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THE CAUSES OF THE PANIC OF 1893 



LHE CAUSES OF THE PANIC 
OF 1893 



BY 

W. JETT LAUCK 

Sometime Fellow of Political Economy in the University of Chicago 
Adjunct Professor of Economics and Politics in 
Washington and Lee University 




I ^Rfttt^ePreag 



BOSTON AND NEW YORK 

HOUGHTON, MIFFLIN AND COMPANY 

®f)e fitocr#t>e $re&, Cambridge 

1907 



LIPRARY of CONGRESS; 
i Two Conies Received 
I J UN 20 190/ 
CoDvncrht Entry 

lunt 4,/ 9^7 

tfLASS CL XXC, No, 
COPY B. 



HB31 17 



COPYRIGHT 1907 BY HART, SCHAFFNER * MARX 
ALL RIGHTS RESERVED 



Published June 1907 



To B. 



PREFACE 

This series of books owes its existence to the generosity 
of Messrs. Hart, Schaffner & Marx of Chicago, who 
have shown a special interest in trying to draw the atten- 
tion of American youth to the study of economic and com- 
mercial subjects, and to encourage the best thinking of 
the country to investigate the problems which vitally affect 
the business world of to-day. For this purpose they have 
delegated to the undersigned Committee the task of select- 
ing topics, making all announcements, and awarding prizes 
annually for those who wish to compete. 

In the year ending June 1, 1905, the following topics 
were assigned: — 

1. The cause and extent of the recent industrial progress 

of Germany. 

2. To what is the recent growth of American competition 

in the markets of Europe to be attributed ? 

3. The influence of industrial combinations upon the con- 

dition of the American laborer. 

4. The economic advantages and disadvantages of present 

colonial possessions to the mother country. 

5. The causes of the panic of 1893. 

6. What forms of education should be advised for the ele- 

vation of wage-earners from a lower to a higher 
industrial status in the United States ? 



viii PREFACE 

7. What method of education is best suited for men enter- 
ing upon trade and commerce ? 
The present volume was awarded the first prize. 

Professor J. Laurence Laughlin, 

University of Chicago, Chairman. 
Professor J. B. Clark, 

Columbia University. 
Professor Henry C. Adams, 
University of Michigan. 
Horace White, Esq., 
New York City. 
Hon. Carroll D. Wright, 
Clark College. 



CONTENTS 

INTRODUCTION 

Plan and Scope of the Investigation xiii 

CHAPTER I 

BUSINESS AND TKADE CONDITIONS IN THE UNITED STATES, 
1884-1890 

First Indications of a Revival in Trade and Industry after the Gen- 
eral Depression in Europe and America. — The Building of New 
Railroads, 1886-1890. — Revival in Industry and Agriculture. 
— The Expansion of Interior Trade and the Growth in the Con- 
suming Power of the Country. — Increase in Importations resulting 
in a Trade Balance against the United States. — Unusual Amount 
of American Securities issued during the Years 1886-1890. — 
Acceptance of American Securities by Foreign Creditors in Pay- 
ment of Trade Balances. — Growth of a Surplus Revenue. — 
The Extension of the Protective System. — The Adoption of a 
Policy of Increased Government Expenditures 1 

CHAPTER II 

THE SILVER MOVEMENT IN THE UNITED STATES 

The Fall in the Value of Silver after 1872. — The Act of 1878. — 
Operation of the Act of 1878. — Net Result of the Act of 1878. — 
Causes of the Act of 1890. — Provisions of the Act of 1890. — Sig- 
nificance of the Act of 1890. — Summary of the Financial Situation 
in the United States in the Autumn of 1890 16 

CHAPTER III 

GROWTH OF SPECULATION IN GREAT BRITAIN AND BRIT- 
ISH GAMBLING IN ARGENTINA 

Depression in British Trade and Industry, 1884-1886. — The Re- 
turn of Confidence and the Rapid Extension of Investments, 1887- 



CONTENTS 

1890. — Outgrowth of Speculation. — The Joint-Stock Company 
Mania. — The Combination of Breweries and the Organization 
of Trust and Debenture Companies. — Chilean Nitrate Com- 
panies and Australian Land Mortgage and Financial Flotations. 
— South African Gold-Mining and Diamond Ventures. — The 
Turn of the Speculative Movement toward Argentina. — The 
Boom in Argentine Land Values. — Absorption of Cedulas, or 
Land Mortgage Bonds, by European Investors. — Excessive Issue 
of Argentine Public Loans. — The Suspension of Specie Payments 
and the Evil Effects of a Depreciated and Inconvertible Paper 
Currency. — Total Argentine Liabilities abroad in 1890. — Brit- 
ish Capital Commitments in Argentina. — Total Capital Com- 
mitments in Great Britain during the Period 1887-1890. — The 
Expansion of Credit Transactions and the Precarious Financial 
Situation in Great Britain in 1890 35 



CHAPTER IV 

INDUSTRIAL AND FINANCIAL CONDITIONS IN FRANCE AND 
GERMANY, 1884-1890 

Trade and Industrial Depression in France, 1884-1887. — Return 
of Prosperous Conditions in 1887, and the Organization of the 
Copper Syndicate. — Failure of the Copper Syndicate and the 
Societe des Metaux. — Suspension of the Comptoir d'Escompte. — 
Absence of Speculation in France, 1889-1890. — The Spread of 
Speculation from Great Britain to Germany. — German Capital 
Commitments in Argentina. — The Joint-Stock Company Mania. 
— The Threatened Danger of a Panic averted by the Reichs- 
bank. — Financial Situation in March, 1890 55 



CHAPTER V 

THE PANIC OF 1890 

The Financial Breakdown in Argentina. — The Resultant Liqui- 
dation in Great Britain. — The Baring Failure. — Measures 
adopted by the Bank of England. — Decline in Value of all De- 
scriptions of Securities. — Forced and Voluntary Liquidation in 
Great Britain. — The Effects of Conditions in Great Britain upon 
German Money and Stock Markets. — The Financial and Indus- 
trial Situation in France during the Fall of 1890. — The Return to 
the United States of American Securities held in Great Britain, 
and the Consequent Exports of Gold from the United States. — 



CONTENTS xi 

The Low Level of Bank Reserves in the United States. — Severe 
Stringency in the New York Money Market and the Issue of 
Clearing-House Certificates. — Decline in Stock Values. — Busi- 
ness Failures in the United States during 1890. — Continued 
Return of American Securities by Great Britain during the Year 
1891 and Exports of Gold from the United States 63 



CHAPTER VI 

RECOVERY FROM THE PANIC OF 1890 AND FINANCIAL 
CONDITIONS IN THE UNITED STATES, 1891-1893 

The Extraordinary Grain Crop of 1891 in the United States. — 
Heavy Exports of Grain from the United States in the Face of a 
European Harvest Shortage. — Imports of Gold and Recovery' 
from the Previous Financial Depression. — Appropriations of the 
Fifty-First Congress. — Increase in Circulation of the Country 
through Government Extravagance and Issue of Treasury Notes. 
— Increase in Legal-Tender Holdings of New York Banks. — Le- 
gal-Tender Notes used in the Payment of New York Clearing- 
House Balances. — Increased Percentage of Legal-Tender Notes 
used in the Payment of Customs Duties. — The Payment of 
Government Balances at the New York Clearing-House in Green- 
backs and Treasury Notes. — Withdrawal of Foreign Capital and 
Exports of Gold from the Country. — Presentment of Greenbacks 
and Treasury Notes at the Treasury for Redemption. — Decline 
of the Treasury Gold Reserve below the Statutory Minimum, and 
the General Distrust over the Currency Situation 79 



CHAPTER VII 

THE CRISIS OF 1893 

The Collapse on the New York Stock Market. — Depression of 
Stock Values. — Run of Depositors upon Interior Banks. — 
Withdrawal of Banking Deposits from Eastern Reserve Centres. 
— The Resultant Deficiency in New York Bank Reserves. — The 
Stringency in the Money Market. — Development of a Money 
Famine. — Issue of Clearing-House Certificates. — Mercantile 
and Industrial Failures. — Bank Suspensions and Failures. — 
Repeal of the Silver Purchase Clause of the Sherman Law and 
the Return of Confidence 97 



xii CONTENTS 

CHAPTER VIII 

THE CAUSE OF THE CRISIS OF 1893 

The Crisis of 1893 cannot be ascribed to a Continued Operation 
of the Forces which caused the Panic of 1890 in the United States. 
— Financial and Industrial Conditions in Great Britain, Germany, 
and France during the Period 1891-1893 showed a Healthy De- 
velopment. — Hence the Crisis of 1893 in the United States did 
not arise from any Difficulties abroad. — The Crisis of 1893 
was local in its Occurrence and Cause. — It was not due to an 
Extension of Mercantile and Industrial Credits or to a Scarcity of 
Money in the United States. — It was a Monetary Crisis caused 
by Widespread Apprehension as to the Fixity of the Gold Standard 
of Payments 110 



CHARTS 

I. Percentages of Different Kinds of Money used in paying Cus- 
toms Duties at New York, 1890-1897 87 

II. Net Gold in the Treasury of the United States, 1884-1894 . . 93 



INTRODUCTION 

In approaching the problem of the causes of the crisis 
of 1893, it is necessary to adopt a somewhat unusual mode 
of procedure, owing to the fact that in November, 1890, 
three years previous to the crisis of 1893, a severe finan- 
cial panic was felt in Great Britain, Germany, and the 
United States. 

Such a breakdown in the financial world as that of 
1890, followed by a more violent collapse during 1893, 
suggests a possible connection between these two events. 
In order, therefore, to clear the ground thoroughly before 
entering into a direct examination of the causes of the 
crisis of 1893, it is first necessary to dispose of the pre- 
liminary question as to the effect, if any, of the panic of 
1890 upon the crisis of 1893. To do this properly requires 
the solution of a problem involving two elements: first, 
to discover the causes of the panic of 1890; and, second, to 
ascertain whether these causes were still in operation, even 
in a modified form, after 1890, and consequently whether 
they were in any way responsible for the crisis of 1893. 

The working-out of the first process in this problem — 
the inquiry into the causes of the panic of 1890 — obvi- 
ously necessitates an examination of the financial and 
industrial movements, both at home and abroad, which 
were developing during the years immediately preceding 
1890, and which finally came to a head in the panic of that 
year. 



THE CAUSES OF THE PANIC 
OF 1893 

CHAPTER I 

BUSINESS AND TRADE CONDITIONS IN THE UNITED 

STATES, 1884r-1890 

First Indications of a Revival in Trade and Industry after the General Depres- 
sion in Europe and America. — The Building of New Railroads, 1886-1890. 
— Revival in Industry and Agriculture. — The Expansion of Interior Trade 
and the Growth in the Consuming Power of the Country. — Increase in Impor- 
tations resulting in a Trade Balance against the United States. — Unusual 
Amount of American Securities issued during the Years 1886-1890. — Accept- 
ance of American Securities by Foreign Creditors in Payment of Trade Bal- 
ances. — Growth of a Surplus Revenue. — The Extension of the Protective 
System. — The Adoption of a Policy of Increased Government Expenditures. 

During the year 1882 there was a disastrous financial 
panic in France. Two years later the United States expe- 
rienced a similar calamity. 1 Out of the general depression 
following these two events, however, there soon developed 
a reactionary movement which, year by year, up to 1890, 
grew stronger and more extensive in its influence. In tak- 
ing up the first step, therefore, in the preliminary problem 
of the connection between the panic of 1890 and the crisis 
of 1893, and going backward to trace out the causes of 
the panic of 1890, the starting-point is found to be in the 
United States, where this tendency toward a revival in 
trade and industry first made its appearance. 

Amid the widespread stagnation which followed the 
crisis of 1884 in the United States, there was one excep- 
tional feature which stood out prominently and which 

1 The Commercial and Financial Chronicle, Financial Review of 

1884. 



2 THE CAUSES OF THE PANIC OF 1893 

made itself clearly evident in the fact that confidence 
in the value of railroad property was never lost. 1 But 
owing to the waging of rate wars between competing rail- 
road lines during the two years 1884-85, and the diminu- 
tion in the volume of traffic because of the depression 
in interior trade after the crisis of 1884, dividends on 
railroad stocks were reduced and in many cases passed. 
Consequently there was a hesitancy on the part of invest- 
ors in entering into railroad undertakings of more than 
ordinary magnitude. 2 By the close of the year 1885, 



1 This fact appears from an examination of the quotations of some 
of the representative railroad stocks on the New York market before 
and after the crisis of 1884. (The fractional parts of the quotations 
are omitted.) 





1884 


1885 


Stocks. 


January 


Juno 


December 


December 




Low 


High 


Low 

62 

5 

107 

58 

94 
14 


High 

73 

10 

117 

77 

108 

22 


Low 

76 

5 

113 

69 

83 
16 


High 


Low 


High 


Atch., Top. and 

S. Fe 

Chesapeake and 

Ohio 

Chicago, Burl, and 

Quincy 

Chicago, Mil. and 

St. Paul 

N. Y. Cent, and 

Hud. River . . . 
Northern Pacific . 


80 

13 

118 

84 

110 
18 


80 

15 

123 

94 

115 

27 


78 

6 

122 

81 

92 
18 


84 

11 

132 

89 

101 

26 


86 

13 

138 

96 

106 
30 



Compiled from The Commercial and Financial Chronicle, Financial 
Review of 1886, pp. 77-79. 

2 The year 1884 was marked by a demoralizing rate war, which con- 
tinued through the early half of 1885, and included within its influence 
the trunk lines and the roads west of Chicago. It was also especially 
strong in the East, where the New York Central and Hudson River 
Railroad deliberately attempted to drive the Lake Shore out of busi- 
ness. As might be expected, there was a great reduction in the net earn- 
ings of the railroads on account of these conditions, and as a result capital 
refused to embark in railroad enterprise. During the three years 1885 
to 1887 only 13,649 miles of new railroad were built, in comparison with 
a construction of 28,127 miles during the preceding period of three 
years. 



BUSINESS AND TRADE CONDITIONS 3 

however, the railroad companies had found it both prac- 
tical and necessary to divide the traffic and maintain 
rates. 1 A tolerably certain status in railroad profits was 
thus assured. During the following summer, when there 
were indications of good crops in the face of an active 
foreign demand, and of an improvement in general busi- 
ness and especially in railroad traffic, confidence in rail- 
road enterprise was fully restored and capital once more 
entered freely into railroad construction. 2 

In gathering together their forces for a new start in 
railroad undertakings, the efforts of capitalists were at 
first directed toward the reorganization of some of the 
old companies. The main current of enterprise, however, 
soon turned toward the exploitation of regions in the 
South, the Southwest, and the Northwest, and the con- 
struction of new mileage in these sections was actively 
pushed forward. The lines of the Atchison, Topeka and 
Sante Fe, the Missouri Pacific, the Chicago and Rock 
Island, and the roads leading from Chicago to the North 
and Northwest, were rapidly extended by companies pos- 
sessing strong credit and capable of carrying their projects 
to completion with economy and dispatch. The total 
construction of new lines during the five years beginning 
with 1886 and ending with 1890 was over 39,000 miles 
or an increase of more than 30 per cent., and of this total, 
19,044 miles, or almost one half, was built in the states 
and territories of the Northwest and Southwest. 3 

The significance of this extraordinary extension of 
railroad mileage in its bearing upon general industrial 
conditions becomes evident at a glance. Taking the 
country as a whole, a very moderate estimate of the cost 

1 During the latter half of 1885 the West Shore Railroad was absorbed 
by its rival the New York Central, and a pool was organized by the 
trunk lines and other companies to distribute the traffic and maintain 
rates. 

2 The Commercial and Financial Chronicle, Financial Review of 1886 
p. 1. 

3 The total railroad construction during this period, and the distri- 



4 THE CAUSES OF THE PANIC OF 1893 

of railroad construction, including stations, terminals, 
tunnels, and rolling-stock equipment, could not have been 
less than $20,000 per mile. The building of 39,000 miles 
of railroad, therefore, during the period 1886-90 called 
for an investment, in one way or another, of over $780,- 
000,000, and the demand for commodities of all kinds 
flowing from this enormous outlay of capital soon made 
itself felt in all lines of production. 

The iron and steel industry, which is usually consid- 
ered to be a barometer of general industrial conditions, 
advancing step by step with the progress in railroad con- 
struction, passed through a period of unprecedented 



bution of the mileage among the different states and territories may 
be readily seen in the following table, compiled from Poor's Manual 
of Railroads: 

RAILROAD CONSTRUCTION IN THE UNITED STATES, 1886-1890. 



States and Territories. 


1886 


1887 


1888 


1889 


1890 


New England Group . . . 

Middle Group 

Central North Group — 
O., Mich., Ind., 111., 
Wis 


43 
338 

1,288 

847 

319 

2,245 

2,481 

513 
8,128 


131 

227 

1,784 

800 

763 

5,351 

3,209 

685 


192 

299 

900 

1,202 

1,025 

1,574 

879 

954 


92 
451 

911 

1,183 

851 

886 

662 

664 


102 

488 

734 


South Atlantic Group — 
Va.,W.Va.,N. C.,S. C, 
Ga., Fla 


1,190 


Gulf and Miss. Val. 
Group — Ala., Miss., 
Tenn., Ky., La 

Southwestern Group — 
Mo., Ark., Tex., Kan., 
Colo., N. M., I. T. 

Northwestern Group — 
la., Minn., Neb., Dak., 
Wyo., Mont 

Pacific Group — Wash., 
Ore., Cal., Nev., Id., 
Ariz., Utah 


752 
928 
829 
645 


Total United States . . . 


12,982 


7,028 


5,695 


5,670 



BUSINESS AND TRADE CONDITIONS 5 

prosperity during the years 1886-90. * An expansion in 
iron ore and coal mining quickly followed. 2 From these 
industries so directly connected with the iron and steel 
trade, the revivifying movement spread outward and 
included within its influence all branches of manufactur- 
ing and extractive enterprise. 3 At the same time a re- 
vival in agriculture was clearly in evidence. The remark- 
able activity in railroad construction during the period 
1886-90, as already seen, was mainly turned toward 
the sparsely settled regions of the South, Southwest, and 
Northwest. The railroad companies entering these dis- 
tricts were in possession of immense tracts of land, and 
in order to exploit the country and develop traffic, these 
holdings, together with large areas of government terri- 
tory, were thrown open on generous terms to settlers. 4 

1 The rapid increase in the production of iron and steel is shown in 
the following table compiled from the Annual Reports of the American 
Steel and Iron Association: 





Iron Fur- 


Production of 


Production 


Production of 


Year. 


naces in 


Pig Iron. 


of Bessemer 


Bessemer 


Blast. 


All kinds. 


Steel Ingots. 


Steel Rails. 




Number. 


Net tons. 


Net tons. 


Net tons. 


1885 


276 


4,529,869 


1,701,762 


1,074,607 


1886 


331 


6,365,328 


2,541,493 


1,763,667 


1887 


339 


7,187,206 


3,288,357 


2,354,132 


1888 


332 


7,268,507 


2,812,500 


1,552,631 


1889 


344 


8,516,079 


3,281,829 


1,691,264 


1890 


311 


10,307,028 


4,131,535 


2,091,978 



2 Annual Report of the American Steel and Iron Association, 1889, 
pp. 17, 24. 

Profits during the years 1886-87 were very large. The price of No. 1 
pig iron reached $21.50 per ton in 1887, and steel rails sold as high 
as $40 per ton in March of the same year. Throughout the subsequent 
period, 1888-90, prices were such as to insure good profits. 

3 The Commercial and Financial Chronicle, Financial Reviews 
1886-1890. 

Statistical Abstract of the United States, 1894, p. 352. 

4 The combined land sales of the Union, Central, Northern, and 
Kansas Pacific railroads, together with the Atchison, Topeka and Santa 
Fe, amounted during the years 1886-87 to 2,696,821 acres. 

The enormous acreage of government lands made available for agri- 



6 THE CAUSES OF THE PANIC OF 1893 

This policy on the part of the railroads and the Federal 
Government was followed by the influx of a large and 
industrious population into the newly opened districts, 
and under its management the soil was quickly brought 
under cultivation and made to contribute in large meas- 
ure to the agricultural resources of the country. 1 The 
effect was clearly visible during the years 1886-90. The 
entire period was marked by good crops, profitable prices 
for agricultural products, and by a healthy and prosper- 
ous growth among the agricultural as well as the manu- 
facturing interests. 

This unusual activity in manufacturing and agricultural 
operations was quickly reflected in a rapid expansion of 
trade and business. Confidence was fully restored and no 
difficulty was experienced in securing loans and discounts. 
The banks throughout the country steadily extended 
their credit operations. 2 The movement of freight on the 

culture and other purposes, and the close connection between the ex- 
ploitation of the country and the building of railroads is shown in the 
following table: 

TOTAL DISPOSALS OF PUBLIC LANDS, BOTH FOR CASH AND UNDER 
THE HOMESTEAD AND TIMBER CULTURE LAWS, 1885-88. 



States and 


1885 


1886 


1887 


1888 


Total 
for period. 

Acres 


Territories 


Acres 


Acres 


Acres 


Acres 


Northwest . 
Southwest . 

Southern. . . 


8,808,172 

3,827,499 

2,386,532 

979,360 


7,414,256 

7,231,625 

2,543,225 

986,501 


6,093,676 
6,622,192 
2,700,256 
1,865,841 


4,933,501 
5,509,470 
3,426,361 
2,332,289 


27,249,605 

23,190,786 

11,026,374 

6,163,991 


Total . . . 


16,001,563 


18,175,607 


17,281,965 


16,201,621 


67,660,756 



During the two years 1889-90 there was a decline in railroad con- 
struction, and the mileage built was more evenly distributed over the 
country than in previous years. The Commercial and Financial Chron- 
icle, vol. xlvii (December 1, 1888), pp. 652-53. 

1 Abstract of the Twelfth Census, 1900, p. 32. The Commercial and 
Financial Chronicle, Review of 1890, p. 3. 

A large percentage of the new settlers were immigrants from North- 
ern Europe. Statistical Abstract of the United States, 1895, pp. 355-56. 

2 There was never any severe and continued stringency in the money 
market during the period 1886-88, when railroads and other industries 



BUSINESS AND TRADE CONDITIONS 7 

railroads during 1886 was largely in excess of any pre- 
vious year, and with this before unparalleled record as 
a starting-point, the aggregate tonnage carried, together 
with the gross receipts from traffic operations, constantly 
increased during the subsequent four years. 1 A similar 

called for a large amount of funds, and not until the latter half of 1890 
was there any such difficulty in getting call loans in New York as to 
interfere with the operations of the Stock Exchange. Throughout this 
period, however, the banks, as a result of the commercial and indus- 
trial activity, were greatly increasing their loans and discounts. This 
fact appears in the following statement of the loans and deposits of 
national banks, taken from the Reports of the Comptroller of the Cur- 
rency : 

LOANS AND NET DEPOSITS OF NATIONAL BANKS, WITH RATIOS 
OF LOANS TO CAPITAL, SURPLUS, AND NET DEPOSITS, AND OF 
CASH TO NET DEPOSITS, FROM 1885 TO 1890. 



New York City. 


Total United States. 




Loans 
Millions 


Ratios of 
Loans to 
Capital, 
Surplus, 
and Net 
Depos- 
its. 
Per cent. 


Cash 

to Net 

Depos- 

sits. 

Per cent. 


Loans 
Millions 


Ratios of 

Loans to 
Capital, 
Surplus, 
and Net 

Deposits. 

Per cent. 


Cash to 

Net 
Depos- 
its. 

Per cent. 


Oct. 1, 1885 
Oct. 7, 1886 
Oct. 5, 1887 
Oct. 4, 1888 
Sept. 30, 1889 
Oct. 2, 1890 


236.8 
253.7 
258.0 
292.5 
303.9 
297.1 


62.3 

71.7 
70.9 
69.2 

72.4 
71.0 


36.8 
27.1 
28.0 
28.1 
25.1 
27.8 


1301.2 
1443.7 
1580.0 
1674.9 
1805.7 
1970.0 


67.7 
71.9 
73.8 
72.1 
73.2 
75.1 


21.1 

17.3 
17.6 
17.4 
15.9 
16.1 



1 The increase in the amount of freight carried and in the total gross 
earnings of the railroads of the country is shown in the following table, 
compiled from Poor's Manual of Railroads for 1891, pp. v and xiii: 

TOTAL TONNAGE AND GROSS EARNINGS OF THE RAILROADS 
OF THE UNITED STATES, 1886-1890. 





Freight 
Carried. 

Tons. 


Gross 
Earnings. 

Dollars. 


Increase over 
preceding year. 


Year. 


Freight 

Carried. 

Tons. 


Gross 

Earnings. 

Dollars. 


1886 
1887 
1888 
1889 
1890 


482,245,254 
552,074,752 
590,857,353 
619,165,630 
701,344,437 


829,940,836 

940,150,702 

960,256,270 

1,002,926,059 

1,097,847,428 


45,205,155 
69,829,498 
48,782,601 
28,308,277 
82,178,807 


57,371,953 
110,209,866 
20,105,568 
42,669,789 
94,921,369 



8 THE CAUSES OF THE PANIC OF 1893 

growth in the total bank clearings of the country was 
noticeable and was especially marked in the clearing- 
houses of the Southern, Western, and Pacific States. 1 
The increasing volume of interior trade, which was thus 
clearly indicated, averaged well in profits and gave to 
labor steady and remunerative employment. This fact, 
together with the extraordinary industrial development 
and the increase in population, added greatly to the wealth 
and consuming power of the entire country, and led to 
a demand for commodities which soon overreached the 
domestic market and was only satisfied by heavy impor- 
tations of all descriptions of goods. 

The total annual value of imports of merchandise into 
the United States increased from $577,527,329 in the 
year 1885 to $789,310,409 in 1890. 2 This amazing growth 
was not confined to any special class of goods, but in- 
cluded commodities of every kind, ranging in variety 
from capital instruments to articles of luxury. 3 The de- 
mand for foreign products, which, as already seen, had 
reached extraordinary proportions because of the in- 
creased wealth and population of the country, was further 
stimulated by British producers who, after the year 1887, 

1 The growth in the amount of bank clearings for the entire country 
as compared with the clearings outside of New York City was as follows 
(The Commercial and Financial Chronicle, Annual Review for 1891, 
p. 11): 

BANK CLEARINGS IN THE UNITED STATES, 1885-1890. (000 omitted.) 



Year. 


Total all. 


Outside New York, 


1885 
1886 
1887 
1888 
1889 
1890 


$41,474,041 
49,293,721 
51,147,529 
49,541,635 
56,175,328 
60,117,891 


$13,321,840 
15,616,891 
17,672,973 
18,441,607 
20,280,223 
22,659,283 



2 Statistical Abstract of the United States, 1894, p. 73. 
8 Ibid. pp. 228-229. 



BUSINESS AND TRADE CONDITIONS 9 

were aggressively seeking markets abroad and were will- 
ing to accept foreign securities in payment for their goods. 1 
On the other hand, because of the growth in wealth and 
population of the United States, a larger percentage of 
domestic products was consumed at home. 2 The ex- 
portation of grain from India and Argentina was also 
beginning at this time to exert a strong influence in the 
world market, and, together with good yields from Euro- 
pean harvests, lowered the price of cereals at Liverpool. 
The quantity of American agricultural products which 
were available for export was, therefore, lessened in 
value. 3 The result was that the advance in value of our 
exports, not only to Great Britain but to all other coun- 
tries, failed to keep pace with the rapid increase in the 
value of our imports. During the year 1887 the excess 
of exports over imports of merchandise amounted, in 
round numbers, to only twenty-three million dollars, 
while the imports of gold exceeded exports by thirty- 
three million dollars, thus leaving a trade balance against 
the United States of about ten million dollars. In the fol- 
lowing year imports of gold and merchandise exceeded 
exports by over sixty -three million dollars. 4 During the 
year 1889 imports of merchandise also were over two 
million dollars greater in value than exports. 5 

During these same years the rapid industrial develop- 

1 On account of these easy conditions of payment, British goods 
found a favorable market in this country, the annual purchases from 
the United Kingdom growing in value from $136,701,780 in 1885 to 
$186,488,956 in 1890. Statistical Abstract of the United States, 1894, 
p. 81. 

2 In 1880 only 17 per cent, of the total value of our agricultural pro- 
ducts were retained for domestic consumption; in 1889, over 27 per 
cent, were consumed at home. In 1880 our consumption of domestic 
merchandise, other than manufactures, was slightly more than 12 per 
cent, in value of our total production; in 1889 we consumed 19 per cent, 
of the total value of domestic merchandise produced. Statistical Ab- 
stract of the United States, 1894, p. 157. 

3 A. D. Noyes, Thirty Years of American Finance, pp. 121-122. 

4 Statistical Abstract of the United States, 1894, pp. 51, 73. 

5 Ibid. p. 73. 



10 



THE CAUSES OF THE PANIC OF 1893 



ment in the United States, as already pointed out, had 
called for the investment of an immense amount of cap- 
ital. This capital was obtained by the flotation of an un- 
usually large volume of securities. The railroad companies 
in carrying out their extensive construction projects during 
the five years 1886-90 increased their total indebtedness 
about two and one half billion dollars, and almost the 
whole of this extraordinary sum was funded in the shape 
of stocks and bonds. 1 The annual listing of new issues 
of bonds on the New York Stock Exchange, the greater 
part of which were offered by the railroads, was almost 
100 per cent, greater in value in the year 1890 than in 1885. 
During the same time the annual listing of new stock 
issues increased in value over 900 per cent. The value of 
both the old and the new issues listed during these years 
was as follows: 2 

LISTINGS ON THE NEW YORK STOCK EXCHANGE, 1885-1890. 



BONDS. 


STOCKS. 




New Issues. 


Total Old and 
New Issues. 


New Issues. 


Total Old and 
New Issues. 


1885 

1886 
1887 
1888 
1889 
1890 


$103,884,000 
81,641,000 
180,386,000 
261,089,631 
206,684,000 
198,158,850 


$197,259,000 
238,097,690 
343,477,321 
511,002,218 
389,720,000 
684,867,879 


$17,783,116 
54,006,350 
48,726,791 
62,408,357 
69,721,717 

164,461,729 


$56,913,116 
329,469,350 

270,053,550 
248,228,275 
259,649,774 
437,992,330 



Commencing with the year 1887 there was also a strong 
movement toward the organization of industrial plants 
into joint-stock corporations. More than $500,000,000 in 
stocks and bonds were issued by these combinations dur- 
ing the four years 1 887-90. 3 In street-railway, gas, electric 

1 Poor's Manual of Railroads, 1891, p. iv. 

2 The Commercial and Financial Chronicle, Financial Review for 1891, 
p. 12. 

3 Industrial Continuations in the United States. I5y Luther Conant, Jr. 
Publicat ions of the American Statistical 'Association, vol. vii (March, 1901) 
p. 12. 



BUSINESS AND TRADE CONDITIONS 11 

lighting, and Western land development companies, and 
similar fields of joint-stock enterprise, the promoter was 
equally active. , Unfortunately, no statistics are available 
by means of which an accurate estimate might be made 
of the total amount of securities issued in the United States 
during the period 1886-90, but from this activity in smaller 
undertakings, together with the flotations of the railroads 
and large industrial corporations, some conception may 
be had of the immense and unusual volume of stocks and 
bonds offered to home and foreign investors. 

The amount of these securities purchased abroad is 
even more difficult to estimate than the total sum issued. 
From the course of international trade, as already pointed 
out, it was clear, however, that Americans were importing 
more goods than they could immediately pay for, and 
were settling their balances by turning over to their for- 
eign creditors evidences of debt in the shape of stocks and 
bonds. The fact of a constantly decreasing surplus of 
merchandise exports over imports after the year 1886, 
which finally resulted in an excess of imports during the 
two years 1888-89, plainly indicated that millions of dol- 
lars in American securities, not only of the new issues but 
of the old listings of the stock exchanges, were being ab- 
sorbed by the British and European markets. The net 
importation of over $33,000,000 in gold during the year 
1887 in the face of a balance of more than $23,000,000 in 
merchandise exports in favor of the United States, also 
showed that in addition to the negotiation of heavy loans 
and the flotation of securities abroad, a large amount of 
our stocks and bonds were being quietly bought by foreign 
investors in the open market. As a matter of fact, con- 
ditions in Great Britain were especially favorable for the 
placing of new loans and companies. The improvement 
in trade and business there had inspired the country with 
confidence, and capital was obtainable on very easy terms. 
For this reason and also because the bulk of the increased 



12 TIIE CAUSES OF THE PANIC OF 1893 

imports into the United States during the years 1887-90 
came from the United Kingdom, England became our 
greatest creditor. A large part of our new railroad issues 
were floated in that country, more than $100,000,000 in 
the slocks and bonds of American railroads being taken 
in the London market during the three years 1887-89. * 
British capital also freely entered into other American 
industrial undertakings and many enterprises of strictly 
British origin were incorporated to carry on operations 
in this country, including even joint-stock companies 
to acquire breweries in the United States and to exploit 
the newly opened districts of the West and South. The 
international trade situation, in short, throughout the 
entire period beginning with the year 1886, and ending 
with 1890, plainly indicated, (1) that this country was 
purchasing larger quantities of goods abroad, especially 
in Great Britain, than it could immediately pay for, and 
foreign creditors were accepting payment in American 
securities; (2) that large loans were being negotiated by 
American capitalists in British and Continental markets; 
and (S) that European and English investors were not 
drawing upon their interest accounts, but were investing 
their balances here as fast as they accrued. 

During this period there was another movement in 
evidence, however, which in its final consequences was 
even more far-reaching than the growth in our indebted- 
ness abroad. The large increase in our imports added 
greatly to the receipts of the Government from customs 
duties. At the same time the increased consumption of 
domestic products arising from our expansion in wealth 
and population was productive of larger revenues from 
internal taxes. 2 The exploitation of the Northwest and 



1 Tin- London Economist, Commercial History and Review <>f the 

Years 1887 Si). 

-' The receipts from internal revenue taxes increased from $116,806,986 
in 1SS<> to $142,606,705 in 1890, the receipts from import duties from 



BUSINESS AND TRADE CONDITIONS IS 

Southwest also augmented the receipts from the sale of 
public lands. A combined result soon became apparent 
in the accumulation of an unprecedented Treasury sur- 
plus, which finally assumed such proportions as to impede, 
by the absorption of the circulating medium of the coun- 
try, the movement of crops and other commercial and 
financial operations. 1 

The practical remedy for the situation was, of course, 
the reduction of revenue duties to a point where the re- 
ceipts from taxation would correspond to the expenses 
of the Government. It was impossible to adopt this policy, 
however, because of a protectionist majority in the Senate. 
In order, therefore, to get rid of the constantly accumu- 
lating revenue and to prevent the recurring stringency in 
the money market, the Secretaries of the Treasury, during 
the three years 1887-89, were forced to purchase Govern- 
ment bonds, both at par and at a premium, in the open 
market, to pay in advance the interest charges on Govern- 
ment obligations, and to deposit Government funds with 
banks. 3 

But these measures of relief were unavailing, and the 
disposal of the surplus revenue soon became a question 
of practical politics. In his annual reports to Congress, 

$181,471,939 in 1886 to $229,668,584 in 1890. Statistical Abstract of the 
United States, 1894, p. 20. 

1 The surplus remaining at the close of each fiscal year after all the 
obligations of the government had been paid, exclusive of such funds as 
that for the redemption of the national bank notes, appeared as follows 
in the Finance Reports, 1886-90. 



1886, 


$103,471,097 


1887, 


80,023,570 


1888, 


119,012,116 


1889, 


105,053,448 


1890, 


37,239,762 



$445,399,988 

2 As a result of this policy the total interest-bearing debt of the United 
States was decreased from $1,146,014,100 in 1886 to $725,393,110 in 
1890. The cost to the national treasury in premium on bonds amounted 
to almost $46,000,000. Report of the Secretary of the Treasury, 1890, pp. 
xevi, exxiii. 



14 THE CAUSES OF THE PANIC OF 1893 

Secretary Fairchild, of the first Cleveland administration, 
repeatedly recommended a reduction in the customs du- 
ties. 1 As a manifesto of party policy in the approaching 
campaign, the Democratic majority in the House had 
already passed the Mills Bill, providing for a substantial 
reduction in the tariff schedules. Shortly afterwards the 
Republicans in the Senate squarely met the issue by enact- 
ing a high tariff measure and announcing their deter- 
mination to repeal the internal revenue taxes rather than 
sacrifice the protective principle. 2 During the ensuing can- 
vass, this pronounced position on the tariff question was 
supplemented by the promises of the Democratic and Re- 
publican party platforms relative to the administration of 
the Government finances, the former supporting a policy 
of retrenchment and economy, the latter advocating a 
more extended range of Federal expenditure. 

The outcome was the election of President Harrison. 
The Republican leaders, interpreting his success as a 
popular approval of their attitude, at once proceeded to 
put their expressed policy into practical operation. The 
McKinley tariff law which raised the average rate of duty 
to 48.71 per cent, and placed sugar and other productive 
sources of customs receipts on the free list, and which was 
framed with the object of doing away with the surplus 
revenue, was passed by Congress and became law on Oc- 
tober 1, 1890. At the same time the preliminary steps were 
taken to dispose of the existing Treasury surplus and any 
further excess, by means of an increase in congressional 
appropriations. President Harrison, in his first annual 
message, urged additional appropriations not only for the 
navy and for coast defense, but even for the Pension De- 
partment and for river and harbor improvements. Con- 
gress was not slow to respond, and the aggregate appro- 

1 Report of the Secretary of the Treasury, 1887, p. xxxi. Ibid. 1888, 
p. xxvii. 

2 Taussig, Tariff History of the United States, pp. 253-254. 



BUSINESS AND TRADE CONDITIONS 15 

priations authorized by the Fiftieth Congress, which held 
its sessions during the fiscal years 1889-90, were more 
than $61,000,000 greater than the appropriations of the 
preceding Congress. 1 

But the triumph of the Republican party in securing the 
adoption of its program of increased expenditures and an 
extension of the protective system had not been attained 
without a costly compromise in the form of the Sherman 
silver purchase law which was enacted by Congress on 
July 14, 1890. As a matter of fact, this legislative measure 
was the direct outcome of a movement for the free coinage 
of silver which had its origin more than twelve years prior 
to the year 1890, and which, by means of constant agitation, 
had exerted a strong influence upon the course of our 
financial affairs. In order, therefore, to obtain a complete 
understanding of the financial situation in the United 
States on the eve of the panic of 1890 as well as to secure 
a proper setting for the continuance of our account, it is 
necessary to review briefly the silver agitation and the 
effect of our silver legislation upon trade and industry 
during the period 1878-90. As a preliminary step to a con- 
ception of the true significance of the silver movement, 
a glance must also be taken at the position of silver both as 
a commodity in the international market and as a money 
material in the financial systems of other countries at the 
time the United States was entering upon its first experi- 
ment in silver legislation. 

1 Report of the Secretary of the Treasury, 1891, p. cxii. 



CHAPTER II 

THH SILVEB MOVEMENT in THE UNITED STATES 

The p»l] in the Value of Silver after L872. The a.i of L878. Operation <>f 
the wi of 1878. nh Result <>f the ah <.r is7s. -Causes of the A,o1 of 

L890. Provisions of lllr Acl. of IS'.)(). Signlfioanoe of (lit- Act of IS'.IO. 

Summary of the Financial Situation la the United States In the Autumn of 
1800. 

The middle of the nineteenth century was marked by the 
discovery of gold in California and Australia, and during 
the twenty-five years subsequent i<> the year 1850 there 
was an extraordinary increase in the world's production 
of that precious metal, the output from I he mines during 
this period being equal in value i<> the i<>i:il amounl pre- 
viously extracted from the time of the discovery of America 
by Columbus. The remarkable addition to the gold-supply 
during these years was also accompanied l>y ;« steady 
growth in the production of silver. The percentage of 
increase in ilie amounl of silver annually given forth l>\ the 

mines ranged from 25 to - r >0 per cent iii llie years imme- 
diately following 1850, and went still higher at the close of 
the period, on accounl of the uncovering of rich deposits 
in the State of Nevada. 1 

Since gold possesses greater value in smaller bulk and is 

consequently much more desirable for monetary purposes 
than silver, the leading commercial nations of the world 
soon began to avail themselves of the opportunity offered 
by the increased gold supply to add to their stocks of 
gold and to substitute gold for silver in their currency. As 

1 The total amounl of !:<>M and silver produced in the world before 
1850, and from 1851 to 1875 was as follows; 

1 109 L850 $8,81 11,558,000 (7,848,450,000 

IS/.1 iS7f> 8,817,685,000 1,895,185,000 



SILVER MOVEMENT IN UNITED STATES 17 

early as the year 1852 Prance commenced i<> displace her 
silver coins wiili gold, and during the period L852 64 
she absorbed in this way $1,168,000,000 in gold and 
$845,000,000 in silver disappeared from her circulation. 
The Scandinavian Governments soon adopted a policy 
similar l<> that of France, and in IH7I Germany also intro- 
duced a «^ol«l currency in place of her previous silver cur- 
rency. By the year IH71 more than $270,000,000 iii silver 
coins had been exchanged by the German Government for 
gold, and the surplus stock of silver thus created was offered 
Tor sale in the open market. Holland during the year L878 
practically adopted the gold standard, and in 1874 Prance, 

Belgium, Ctaly, and (jireece, llie eounlries composing Uie 

Latin Monetary Union, suspended the free coinage of silver 
and limited the amount of silver which might be annually 
coined at the mints of each member of Uie Union. 1 

A large amount of silver was thus thrown upon the 
market by the united action of commercial nations in dis- 
placing their silver currency with gold. This surplus was 
also enlarged by the steadily increasing output of the 
silver-mines. The resultant excess in llie silver-supply was 
for a number of years absorbed by India and the Bast, 

the arnounl of silver taken by India alone during the period 

1852 75 being estimated at more than one billion dollars. 

After the close of llie Civil War in I lie llniled States, how- 
ever, llie exportation of cotton from India, was greatly 
reduced, and at the same linn" the indebtedness of [ndia 
in England, through loans negotiated by the Indian Gov- 
ernment, was largely increased. Consequently India was 
noi in a position to absorb llie large amount of silver that 
she bad done in former years. The outlel for the surplus 

silver displaced by <i;old in llie currency of European 
eounlries was, therefore, lo :i great extent CUl oil', and I lie 

logical outcome of ibis large curtailment of demand soon 

1 The k'old standard waa .-i « l« >j »!<•< I by Italy in L888, thui canfinfl 
u further curtailment of the demand for silver. 



18 THE CAUSES OF THE PANIC OF 1893 

made itself evident in a rapid decline in the value of silver. 
The tendency in this direction was first noticeable after the 
year 1872, and by 1878 the value of a fine ounce of silver 
had fallen to $1.15, or 17 cents below the quotation of six 
years earlier. Strange as it may seem, however, it was in 
the face of this situation, when the commercial nations of 
Europe were discarding their silver currency and when the 
value of silver in the international market had declined to 
a point where the bullion in an American silver dollar was 
worth only 89 cents, that this country entered upon its first 
experiment in silver legislation by authorizing a large 
annual increase in the coinage of silver dollars. 1 

The possibility of securing an inflation of the currency 
of the United States by means of the coinage of a cheap 
silver dollar appealed strongly to those persons who had 
opposed the resumption of specie payments and who had 
advocated the continuance of the depreciated legal-tender 
notes. They eagerly joined forces with the mining and 
other interests which were peculiarly concerned with main- 
taining the value of silver, and under the plea that silver 
had been surreptitiously demonetized by the coinage law 
of 1873 the agitation for a cheap currency was actively 
renewed. In December, 1876, a bill for the free coinage of 
silver was passed by the House of Representatives, but 
was unfavorably received in the Senate. A similar measure 
was again passed in the House during November, 1877, by 
a vote of 163 to 34. In the Senate, however, the free coinage 
provision was stricken from the bill, and in its place a 
section was substituted authorizing the Secretary of the 
Treasury to purchase and coin each month not more than 
four million nor less than two million dollars' worth of silver 
bullion. The standard silver dollars coined from this 

1 A complete account of the forces leading to the fall in the value of 
silver, and the displacement of silver by gold in the currencies of the prin- 
cipal commercial nations after the year 1850, is to be found in J. Laurence 
Laughlin's History of Bimetallism in the United States (New York, 1897, 
4th edition), part'ii, pp. 109-206. 



SILVER MOVEMENT IN UNITED STATES 19 

bullion were to be a "legal tender at their nominal value, 
for all debts and dues public and private, except when 
otherwise expressly stipulated in the contract." Silver 
certificates of denominations not less than ten dollars were 
also authorized and were to be issued by the Secretary of 
the Treasury on the deposit of silver dollars authorized 
by the Act, and such certificates were to be "receivable for 
customs, taxes, and all public dues." In this amended 
form the bill was accepted by the House, and was finally 
enacted by Congress on February 28, 1878, over President 
Hayes's veto. 1 

Under the operation of the Act of 1878 each Secretary 
of the Treasury practically kept within the minimum 
requirements of the law and did not purchase more than 
two million dollars' worth of silver per month. The amount 
of standard silver dollar pieces that could be coined from 
the silver bullion purchased by two million dollars' worth 
of legal-tender paper prior to the resumption of specie 
payments on January 1, 1879, and by gold after that date, 
varied of course with the price of silver bullion, and 
averaged about two and one-half million silver dollar 
pieces per month, or from twenty-seven to thirty-four 
million standard silver dollars annually. The problem 
that confronted the Treasury officials was to inject this 
amount of silver dollars into the permanent circulation of 
the country. It was obvious that if silver were permitted 
to accumulate in Government receipts from customs and 
internal revenue taxes, it would displace a corresponding 
amount of gold. At the same time, the Treasury gold 
reserve would soon be exhausted by the payment of Gov- 
ernment obligations and the currency of the country re- 
duced to a depreciated silver basis. 

1 A detailed discussion of this enactment, as well as subsequent silver 
legislation, is to be found in the Report of the Monetary Commission, 1898; 
F. W. Taussig's The Silver Situation in the United States (New York, 
1893); A. D. Noyes's Thirty Years of American Finance (New York, 
1898); and J. Laurence Laughlin's History of Bimetallism in the United 
States, referred to above. 



20 THE CAUSES OF THE PANIC OF 1893 

During the two years immediately following the passage 
of the Act, almost all the silver coined by the Government 
was piled up in the Treasury. The silver certificates issued 
in payment for bullion were passed from bank to bank 
until they found their way into the receipts of the Govern- 
ment. 1 Only a few stayed in circulation. At the close of 
the fiscal year 1879, of the thirty-six million dollars which 
had been coined, twenty-eight million remained in the 
Treasury unrepresented by silver certificates in circulation. 
The danger of this situation was enhanced during the early 
half of the year 1880 by a further growth in the Treasury 
holdings of silver accompanied by an even faster decline 
in its stock of gold. Fortunately, however, the existing 
tension was relieved during the latter part of 1880 and 
the two years, 1881-82, by a change in the course of trade 
and industry following the resumption of specie payments. 
Railroad construction was pushed forward on an immense 
scale, the crops were good, interior trade was active, and 
there were heavy importations of gold from abroad fol- 
lowed by an inflow of gold into the Treasury. Under these 
conditions there was a large demand for currency in small 
denominations for use in retail transactions and in "moving 
the crops." Secretary Sherman quickly took advantage 
of the situation by issuing a circular in September, 1880, 
offering drafts on the sub-treasuries in the West and South, 
payable in silver certificates, in return for gold deposited 
at the New York Sub-Treasury. This policy involved the 
expense of transporting silver dollars from one section of 
the country to another, but through its operation a large 
amount of silver was put into circulation, especially from 
the sub-treasuries at St. Louis and New Orleans. 

But the active period in industry and trade during the 

1 A significant indication of the distrust of the new silver issues in bank- 
ing circles was soon made evident by the action of the New York Clearing- 
House Association on November 12, 1878, when the New York Sub- 
Treasury was admitted to membership. On that occasion a resolution 
was passed prohibiting the payment of balances in silver certificates or 
silver dollars. 



SILVER MOVEMENT IN UNITED STATES 21 

period 1880-82 was succeeded by the usual reactionary 
movement. The year 1883 was one of steadily increasing 
depression in financial and commercial affairs. The num- 
ber of small business transactions, and especially those 
requiring the use of money, diminished, the currency of the 
country became redundant, a large amount of silver 
accumulated in the banks, and by the banks was worked 
off on the Treasury in the payment of customs duties. At 
the same time the Secretary of the Treasury was required, 
under the provisions of the Act of 1878, arbitrarily to coin 
into silver dollars and attempt to put into circulation two 
million dollars' worth of silver bullion each month, irre- 
spective of the demands of business and trade. The logical 
outcome of this course of affairs was soon reached. Since 
the banks hoarded the gold which came into their posses- 
sion and poured their silver into the Treasury by way of 
the customs revenue, the opportunity of replenishing the 
Treasury holdings of gold was constantly being diminished. 
On the other hand a steady drain upon the stock of gold 
already accumulated in the Treasury was caused by the 
annual purchase of thirty million dollars' worth of silver 
bullion, by the payment of Government expenditures, and 
by the redemption of the public debt and the demand ob- 
ligations of the Government in the form of legal-tender 
paper. A large supply of silver was, therefore, rapidly 
accumulated by the Treasury, and at the same time its 
gold reserves were steadily reduced. The fear was soon 
openly expressed that the Government would be forced to 
suspend gold payments, and the alarming nature of the 
situation was intensified by the action of the Sub-Treas- 
urer in New York City, who, on February 21, 1884, in a 
letter to the manager of the Clearing-House Association, in- 
timated that it might be necessary to use silver in payment 
of Government balances. This ill-judged hint had the effect 
of spreading the existing alarm to foreign investors in 
American securities, who at once returned large blocks of 



22 THE CAUSES OF THE PANIC OF 1893 

their holdings to he sold on the American market, with 
the result that gold was exported from the country and an 
additional demand made upon the Treasury reserves of 

thai metal. 1 The climax was finally reached in the finan- 
cial crisis of May, L884, which, as already seen, was suc- 
ceeded by a period of restriction in production and of 
general stagnation in industry and trade that extended 
through the years I881-86. 2 Under these conditions there 
was a further accumulation of silver in the Treasury 
attended by a decline in its holdings of gold. The gold 
reserve fell to 120 million dollars in November, 1884, and 

even lower in January, 1885. It was, therefore, clearly 
evident that immediate action was necessary if the drain 
of gold from the Treasury was to be stopped and the 
country saved from a depreciated silver currency. 

On being confronted with this serious situation, the first 
slep taken by the Treasury officials was directed toward 
the maintenance of the existing slock of gold. Previous to 
the year IS81 llie large surplus revenue had made if pos- 
sible to pay oil' many millions of the public debt. During 
September of thai year, however, this policy was discon- 
tinued and none of the 3 per cent, bonds (then redeemable 
at the pleasure of the Government) were called in for re- 
demption until December, 1885. For more than a year 
the surplus revenue, instead of being employed in the 
reduction of the national debt, was used to buy silver, and 
the silver dollars coined from the bullion thus purchased 
Were hoarded in the Treasury and withheld from the 
already redundant circulation of the country. During 
this period efforts were also made to encourage gold re- 
ceipts, and the banks gave moral as well as substantial 
support to ihe exertions of the Government in this direction 
by turning over to the Secretary of the Treasury in July, 

1 During the fiscal year 1881 Ihe excess of exports over imports of gold 
amounted to $18,850,640. 

2 See p. 1 el set/. 



SILVER MOVEMENT IN UNITED STATES 23 

1885, $5,915,000 of gold in return for fractional silver. 
At the same time they announced their intention of fur- 
nishing additional supplies of gold to the Government 
should it be deemed necessary. 

On the other hand, new devices were invented to get 
silver into circulation. Since the issue of national bank 
notes of smaller denominations than five dollars had been 
prohibited by the Resumption Act of 1879, the currency 
in one or two dollar denominations at this time consisted 
almost exclusively of United States notes, or greenbacks. 
After June, 1885, however, the issue of these greenbacks 
in denominations less than five dollars was stopped, and 
when the soiled and torn greenbacks of small denomina- 
tions were returned to the Treasury for redemption, they 
were withdrawn from circulation and replaced by green- 
backs of large denominations. This process of retirement 
was slow, but by the year 1886 such a vacuum had been 
created that, under the pressure of a demand for currency 
of small denominations, Congress was prevailed upon to 
authorize the issue of one, two, and five dollar silver cer- 
tificates. Permanent circulation was thus secured for a 
large amount of silver, which took the place of the small 
greenbacks previously retired by the Treasury officials. 

These efforts of the Treasury to maintain its gold reserve 
and provide an outlet for silver were supplemented by the 
influence of a fortunate change in the course of business 
after the year 1885. The period 188G-90, as already 
pointed out, was one of prosperity, marked by a con- 
stantly increasing volume of importations and the re- 
sultant accumulation, largely from customs duties, of an 
unprecedented surplus revenue. 1 This surplus was used 
in paying off the national debt, and, as a consequence, the 
amount of Government bonds available for the purpose 
of guaranteeing the issue of national bank notes was 
rapidly reduced. At the same time, the rate of discount 
1 See footnote 1, p. 13. 



24 



THE CAUSES OE THE PANIC OF 1893 



in the loan market became higher as the result of better 
business conditions, and the banks soon found it much 
more profitable to lend their funds directly than to invest 
in Government bonds to be used as a basis for the issue 
of notes. They, therefore, began to cut down their note 
issues, and by 1890 the amount of national bank notes 
outstanding was $120,000,000 less than in the year 1886. * 
As the notes thus retired were of small denominations a 
further opening was made for the use of silver certificates. 
Moreover, the revival in business and industry after the 
year 1885, owing to the greater rapidity and extent of 
domestic trade, especially in the newly exploited regions 
of the West and South, brought about an increasing 
demand for the use of silver in the payment of wages and 
in other small transactions. 

Under these conditions the efforts of the Treasury 
officials to push silver into circulation were attended with 
good results. During the five years 1886-90 the Treasury's 
accumulations of silver decreased to a point where they 
no longer caused anxiety. Practically all of the silver 
coined during the two years 1889-90 passed into circula- 
tion. In the autumn of 1885 there was also an upward 
movement in the gold reserve, and by the end of that year 
confidence in the ability of the Government to maintain 
gold payments had been restored. Consequently during 
the subsequent period of five years there was a steady 

1 The following figures, taken from Taussig's The Silver Situation in 
the United States, show the amount of national bank notes outstanding 
(in millions of dollars) during the six years 1885-1890: 



Year. 


Total Outstanding. 


Net Amount (less lawful 

money deposited for 

redemption). 


1885 


315.8 


276.3 


1886 


301.5 


219.7 


1887 


272.0 


169.2 


1888 


239.4 


152.4 


1889 


202.0 


130.2 


1890 


179.8 


125.0 



SILVER MOVEMENT IN UNITED STATES 25 

inflow of gold into the Treasury, and the gold reserve was 
ample. 

The danger of a suspension of gold payments was thus 
averted. The outcome, however, was by no means satis- 
factory. Only by the employment of artificial devices, 
such as the substitution of one and two dollar silver certi- 
ficates for the greenbacks of small denominations, had the 
Treasury officials been able to keep silver in circulation 
and maintain the gold standard during the prosperous 
period 188G-90. Even then their efforts had been suc- 
cessful only because they had control of a large surplus 
revenue, which made it possible to hold the silver dollars 
and certificates in the Treasury vaults when the silver 
circulation of the country was redundant. This surplus 
during the good years 1886-90 aided the Treasury indi- 
rectly by creating an outlet for the small silver certificates 
on account of the payment of the public debt and the 
consequent reduction in the national bank note circu- 
lation. So far as the Treasury was concerned, the exist- 
ence of a surplus revenue during almost the entire opera- 
tion of the Act of 1878 was one of the most favorable 
factors in the situation. In the event of a depression of 
business such as marked the two years 1884-85, or the 
adoption of an ill-considered tariff or fiscal policy by the 
Government which would radically cut down or cause a 
deficit in Government revenues, there was every indica- 
tion that silver would again accumulate in the Treasury 
and thus endanger the maintenance of the gold standard 
of payments. 

The policy adopted by the Treasury of retiring United 
States notes, or greenbacks, of small denominations had 
without doubt resulted in creating a vacuum in the circu- 
lation which insured a permanent place for small silver 
certificates. But the void thus created could only make 
room for a certain amount of silver, dependent upon the 
action of the national banks in reducing their note issues. 



26 



THE CAUSES OF THE PANIC OF 1893 



If the Treasury officials transgressed this limitation a 
redundancy of silver in circulation would be the result. 
Moreover, in its ultimate possibilities, the policy of retiring 
the one and two dollar legal-tender notes and reissuing 
them in the form of greenbacks of large denominations 
was, if anything, more dangerous than the effect of the 
immediate accumulation of a large amount of silver dollars 
or silver certificates in the Treasury. The greenbacks 
of small denominations had hitherto found lodgment in 
the hands of the people, had been used continually by 
them in the retail transactions of everyday life, and con- 
sequently had been returned for redemption only when 
they became too soiled or damaged to be of any further 
service. The greenbacks of large denominations which 
were issued in their place were now held by the banks and 
were quickly available, should an occasion present itself, 
for the purpose of drawing off gold from the Treasury. 

The net result, therefore, of the operation of the Act of 
1878 was not only to increase the demand obligations of 
the Government payable in gold to the extent of $378,000,- 

000 1 (the amount of silver dollars coined), but also, by 

1 AMOUNT, COST, AND AVERAGE PRICE OF SILVER PURCHASED 

UNDER THE ACT OF FEBRUARY 28, 1878, AND COINAGE OF 
SILVER DOLLARS THEREFROM: 



Fiscal 
Years. 


Fine Ounces. 


Cost 


Average 

Price per 

Fine Ounce 


Coinage of Silver 
Dollars. 


1878 
1879 

1880 
1881 
1882 
1883 
1884 
1885 
1886 
1SS7 
1888 
1889 
1890 
1891 


10,809,350 
19,248,086 
22,057,862 
19 709,227 
21,190.200 
22,889,241 
21,922,951 
21,791,171 
22,690,652 
26,490,008 
25,386,125 
26,468,861 
27,820,900 
2,797,379 


$13,023,268 
21,593,642 
25,235,081 
22,327,874 
24,054,480 
25,577,327 
24,378,383 
23,747.460 
23,448,960 
25,988,620 
24,237,553 
24,717,853 
20,899,326 
3,049,426 


$1.20 

1.12 

1.14 

1.13 

1.13 

1.11 

1.11 

1.08 

1.03 

.98 

.95 

.93 

.96 

1.09 


$8,573,500 
27,227,500 
27,933,750 
27,637,955 
27,772,075 
28,111,119 
28,099.930 
28,528,552 
29,838,905 
33,266,831 
3'2.718,673 
33,793,860 
35,923,816 
8,740,327 




291,272,018 


$308,279,260 


$1.05 


$378,166,793 



SILVER MOVEMENT IN UNITED STATES 27 

the substitution of greenbacks of large denominations for 
small greenbacks, the way was opened for quickly deplet- 
ing the Treasury of its gold reserve, upon the maintenance 
of which the payment of its obligations depended. It is 
true that the silver dollars and certificates were not directly 
redeemable in gold, but, as a matter of fact, when the 
silver in circulation became redundant, or when appre- 
hension existed as to the maintenance of the gold standard, 
silver dollars and certificates, as already seen, were poured 
into the Treasury through the customs receipts, a corre- 
sponding inflow of gold was cut off, and a process of re- 
demption thus carried out which was as effective in its 
operations as if silver had been directly presented at the" 
Treasury and gold received for it. To the ever-present 
possibility of gold being thus displaced in the Government 
receipts by silver was now added the further danger that 
gold might be drawn from the Treasury by means of the 
greenbacks of large denominations which were carried 
by the banks in their reserves. The maintenance of gold 
payments was therefore imperiled by the possibility of the 
Treasury gold reserve being lost in two ways. On the one 
hand, the additions to the Treasury supply of gold through 
the payment of import duties were in danger of being cut 
off; on the other hand, by making the large greenbacks 
quickly available to the banks, an opportunity was 
afforded of draining the Treasury of its stock of gold 
already accumulated. Under these conditions it was clearly 
evident that the ability of the Treasury to continue gold 
payments during a period of business depression or lack 
of confidence had been greatly impaired. 

But the success of the Treasury in keeping silver in 
circulation and warding off dangers to the standard during 
the period 188G-90 was interpreted by the advocates of 
the free coinage of silver to mean that the Government 
could with impunity greatly increase its silver obligations. 
The agrarian communities of the West and Northwest, 



28 THE CAUSES OF THE PANIC OF 1893 

which desired a larger quantity of money in circulation, 
and the silver-mining States west of the Mississippi, which 
SOUffht to check the constant fall in the value of silver, had 
never been satisfied with the Act of 1878, and had inces- 
santly agitated the question of the free coinage of silver. 
Unfortunately for the country, the political complexion 
of Congress, alter the presidential election of 1888, enabled 
the representatives from these Western States to dominate 
the situation. 

In the election of that year the Republican candidate, 
Benjamin Harrison, secured a majority in the electoral 
college. President Cleveland, however, was given a larger 
number of popular votes than his successful opponent. 
Moreover, his administration of the civil service had lost 
him many supporters, and political intrigue in New York 
had deprived the Democratic parly of the electoral vote 
of that state. Under these conditions, it could scarcely 
be said that the election of President Harrison was a 
decisive indorsement of the issues he advocated. Con- 
sequently, when the Republican leaders declared that the 
result of the election was a popular verdict in favor of 
protection and prepared to extend the protective principle 
by framing the Mckinley tariff law, they encountered not 
only distrust in a large wing of their own party, bul at the 
same time were confronted with a practical difficulty of 
vital importance within Congress itself. The Republican 
majority in the House at the opening of Ihe 51st Congress 
was found to consist of only eight votes, including West- 
ern Representatives who were lukewarm, if not hostile 
on the tariff question. In the Senate the situation from 
a Republican Standpoint was even more unfavorable. The 
paily majority in thai body consisted of only eight Sena- 
tors, and without Ihe support of the members from the 

silver-producing states of the West, who were by no means 
favorably disposed to an extension of the protective system, 
the Republicans would actually be in the minority. Under 



SILVER MOVEMENT IN UNITED STATES 29 

these conditions it was at once evident that some expedient 
must be devised to placate the silver wing of the party, if 
the proposed tariff legislation was to be carried to a suc- 
cessful conclusion. 

At this juncture Mr. Windom, who was then Secretary 
of the Treasury, and who was considerably more of a poli- 
tician than a financier, inaugurated a course of procedure 
which peculiarly emphasized his talents in the way of 
political expediency. In his first annual letter to Con- 
gress he recommended that the Government should buy 
silver at the market price, without any assignable limit, 
and pay for it in notes of the United States, which were 
to be redeemable in silver bullion or in silver dollars or 
gold at the option of the Government or the holders of the 
notes respectively. 

The motive which prompted this ill-considered recom- 
mendation was at once apparent. It was evidently intended 
to placate the silver Senators and Representatives, and 
to secure their support for the McKinley Bill. Every 
prudent congressman shrank from the effect of such an 
unlimited inflation of the currency. But practically all 
that could be done was to limit as far as possible the in- 
jurious features of this politieal compromise which had 
been devised by the Administration. On June 5, 1890, 
the House passed a bill restricting the issue of notes to 
$4,500,000 monthly and making them "redeemable in 
coin, on demand." The Senate, however, promptly turned 
down this measure and enacted a flat free-coinage bill 
which it returned to the House. On the same day the 
McKinley tariff law reached the Senate and that body 
postponed consideration of the tariff measure until final 
action had been taken on its free-coinage bill. The situa- 
tion was awkward for the Administration, as the majority 
vote in the Senate included, with two exceptions, every 
Senator from the silver-producing states of the West which 
Secretary Windom was endeavoring to conciliate. The 



30 THE CAUSES OF THE PANIC OF 1893 

House, however, refused to accept the Senate substitute,' 
and, as is usual in such case's, the Silver Hill was sent to a 
conference committee of both branches of Congress. After 
a week of anxiety among the promoters of the Tariff Hill, 
an agreement was reached by the Senate and House. In 
this amended form the bill received the approval of Presi- 
dent Harrison and became law on July 14, 1890.' 

Because of the fact that the compromise bill was chiefly 
the work of Mr. Sherman, it became subsequently known 
as the "Sherman Act." It provided that the Secretary 
of the Treasury should purchase 4,500,000 ounces of silver 
monthly, and directed him to pay for this in legal-tender 
paper called Treasury notes, which were to be "a legal 
tender in payment of all debts, public and private, except 
when otherwise expressly stipulated in the contract," 
were "receivable for customs, taxes, and all public dues," 
and when held by any national bank were to be counted 
as part of its legal reserve. These notes were to be directly 
redeemable at the Treasury or any sub-treasury "in gold 
or silver coin" at the discretion of the Secretary of the 
Treasury, and as a guide to future action a parity clause 
was added declaring it to be "the established policy of the 
United States to maintain the two metals on a parity with 
each other upon the present legal ratio, or such other ratio 
as may be provided by law." After July 1, 1891, no more 

1 The statement lias been made that the silver law of 1890 was enacted 
not because the silver faction in the Senate demanded silver legislation 

in exchange lor its vote on tlie tariff bill, but for the reason that the failure 
to pass the Sherman haw would have resulted in the enactment of a free- 
coinage hill. This assertion, however, is not borne out by the facts. \\ hen 
the Senate substituted a free-coinage measure for the House bill the 

opportunity was given to pass a free coinage law, but the House refused. 

Moreover, the claim that a free-coinage bill would have been passed if the 
Sherman Law had not been enacted assumes that President Harrison 
would have approved a free-coinage bill. Noves. Thirty Years of Ameri- 
can Finance, pp. 1 17, 148. 

'-' A summary but complete account of the discussion in Congress 
during the year 1S!>0. and of the action of the House and Senate" relative 
to the proposed silver legislation, is to he had from an article entitled 

"The Silver Debate of 1890," l>.\ U. F. Hoxie, The Journal of Political 
Economy, vol. i (September, 1893), pp. 535-587. 



SILVER MOVEMENT IN UNITED STATES 31 

silver dollars were to be coined than were necessary for 
the redemption of the Treasury notes. Until that date, 
2,000,000 ounces of silver per month were to be coined 
into standard silver dollars. 

In comparison with the Act of 1878, the Sherman Law, 
therefore, contained two significant features. Although 
in the first place, it did not repeal but continued the old 
poliey of purchasing silver, yet it made necessary the 
purchase and maintenance in circulation each year of a 
larger amount of silver, since the Treasury notes issued 
under the operation of the Act amounted to about $50,000,- 
000 annually. 1 In the second place the Treasury notes 
thus issued were made directly redeemable in coin, and 
under the further statement that it was "the established 
policy of the United States" to maintain silver and gold 
"at a parity with each other," the redemption provisions 
of the Act of 1890 meant that Treasury notes were to be 
redeemed in gold as long as the Treasury had any gold in 
its possession. In addition, therefore, to increasing the 
almost overwhelming burden of silver obligations already 
carried by the Government, the Sherman Law made it much 
more difficult to preserve the integrity of these obligations 
by providing a direct means of redemption, through the 
operation of which the gold reserves accumulated by the 
Government for redemption purposes might be quickly 
withdrawn from the Treasury. 

Thus had the silver movement worked itself out by the 
latter half of the year 1890. When its probable effect is 
considered in connection with the contemporary state of 

1 The amount of Treasury notes issued each year under the Act of 1890 
was as follows: 



Fiscal year, July 1. 
1891 
1892 
1893 
1894 


Treasury notes issued. 

$50,577,498 

51,106,608 

45,531,375 

8,715,521 




$155,931,002 



32 THE CAUSES OF THE PANIC OF 1893 

international trade and the policy of the Harrison Ad- 
ministration relative to the surplus revenue, it is at once 
apparent that a precarious future was marked out for the 
Treasury. To ascertain accurately the nature of the dan- 
gerous tendencies at work it may not be amiss briefly to 
review the salient features of our story up to this time. 

The period 1886-90 in the United States, it will be re- 
membered, was marked by a rapid and healthy growth 
in trade and industrial activity, which called for the flota- 
tion of an extraordinary amount of railroad and industrial 
stocks and bonds. The increasing wealth and population 
of the country during these same years also led to immense 
importations of foreign commodities, which were largely 
paid for in American securities. Through this willingness 
of our foreign creditors to invest their balances in the 
United States, we had incurred an unusual amount of 
indebtedness abroad. This fact in itself possessed no 
grave elements of danger. Under ordinary conditions, 
owing to the growing wealth and resources of the country, 
our indebtedness abroad would have soon adjusted itself 
through the mechanism of international trade. It was at 
this point, however, that other factors entered in to cause 
serious apprehension. 

The revenues of the Government had been yielding an 
excess over expenditures since 1883, and because of the 
increased customs receipts arising from our heavy im- 
portations, this surplus reached extraordinary proportions 
during the period 1886-90. After the election of 1888 the 
Harrison Administration attempted to get rid of it in two 
ways : first, by inaugurating a policy of increased expendi- 
tures, and, second, by enacting the McKinley Tariff Law, 
one of the objects of which was to cut down Government 
receipts from customs. But the silver wing of the Repub- 
lican party, which held the balance of power in Congress, 
was at this time agitating the question of further silver 
legislation, and, in order to pass the McKinley Law, it was 



SILVER MOVEMENT IN UNITED STATES 33 

first necessary to reach an agreement with this faction. 
Notwithstanding the fact that under the operation of the 
Silver Act of 1878 the Treasury had experienced difficulty 
in maintaining gold payments, the protectionist leaders, 
in return for the passage of the McKinley Bill, gave their 
support to the enactment of the Sherman Silver Law. This 
measure not only added a large annual increment to the 
silver obligations of the Government, but also provided a 
direct means of redemption for the Treasury notes which 
it authorized. 

The dangerous tendency of this tariff and financial legis- 
lation, considered in connection with the existing silver 
situation, the policy of increased Government expenditures, 
and the fact of our indebtedness abroad, can scarcely be 
overdrawn. The Government receipts were to be reduced 
by the McKinley Law, and, at the same time, the funds 
already held by the Treasury were to be dissipated by 
means of heavy expenditures. In the face of this rapid 
reduction of Government resources, the demand obligations 
of the Government were to be increased $50,000,000 annu- 
ally, at a time when the Treasury was laboring under the 
burden of silver obligations placed upon it by the Act of 
1878. 

Such was the fiscal policy inaugurated by the Harrison 
Administration, and as a result of its adoption, it was evident 
that three ways had been thrown open by means of which 
the country might be subjected to a financial panic or acute 
crisis. In the first place, a shock to credit abroad might 
lead to the return of American securities held by foreign 
investors. If our foreign creditors employed this means of 
liquidation to any considerable extent, gold would flow 
out of the country in payment of our indebtedness abroad, 
a drain upon the Treasury reserves would be threatened, 
or actually occur, and would be followed by lack of con- 
fidence at home in the Treasury's ability to maintain gold 
payments. In the second place, the same state of affairs 



34 THE CAUSES OF THE PANIC OF 1893 

might result from an adverse change in the course of trade 
and industry attended by a falling-off in Government re- 
ceipts from customs and internal revenue taxes. In this 
event the Treasury gold receipts might be reduced to a 
point where the preservation of the gold reserve would be 
endangered. Finally, through a redundancy of silver in 
circulation, the customs revenue might be made up of an 
increasing percentage of silver currency which would dis- 
place an equal amount of gold, as had happened under 
the operation of the Act of 1878. If the payments to the 
Government in silver continued to increase, especially under 
a policy of increased Government expenditure, apprehen- 
sion would be felt relative to the ability of the Treasury to 
make gold payments. As a consequence there would be a 
further inflow of silver into the customs. Gold would prob- 
ably be hoarded. The Treasury stock of that metal would 
also be rapidly depleted by the use of the large greenbacks 
held by the banks and a financial crisis made imminent. 
While the condition of affairs in 1890 did not give reason to 
believe that any one or all of these dangerous tendencies 
were immediately threatening, at the same time the existing 
state of affairs made their occurrence possible. They were 
all within the range of possibility, and might operate singly 
or in combination. 

This, in brief, during the autumn of 1890, was the pre- 
carious situation in the United States which had been 
worked out by the play of various industrial, financial, and 
political forces during the preceding seven years. With 
this state of affairs before us, we may now profitably turn 
aside to glance at the industrial and financial developments 
abroad during the same period, for the purpose of ascer- 
taining their possible influence upon subsequent events 
in this country. 



CHAPTER III 

GROWTH OF SPECULATION IN GREAT BRITAIN AND BRITISH 
GAMBLING IN ARGENTINA 

Depression in British Trade and Industry, 1884-1886. — The Return of Con- 
fidence end the Rapid Extension of Investments, 1887-1890. — Outgrowth 
of Speculation. — The Joint-Stock Company Mania. — The Combination of 
Breweries and the Organization of Trust and Debenture Companies. — 
Chilian Nitrate Companies and Australian Land Mortgage and Financial 
Flotations. — South African Gold-Mining and Diamond Ventures. — The 
Turn of the Speculative Movement toward Argentina. — The Boom in Ar- 
gentina Land Values. — Absorption of Cedulas, or Land Mortgage Bonds, 
by European Investors. — Excessive Issue of Argentine Public Loans. — 
The Suspension of Specie Payments and the Evil Effects of a Depreciated and 
Inconvertible Paper Currency. — Total Argentina Liabilities Abroad in 
1890. — British Capital Commitments in Argentina. — Total Capital Com- 
mitments in Great Britain during the Period 1887-1890. — The Expansion 
of Credit Transactions and the Precarious Financial Situation in Great 
Britain in 1890. 

In Great Britain, during the seven years preceding the 
panic of 1890, the trade and industrial situation, although 
differing in detail, was practically identical in its broader 
aspect with developments in the United States during the 
same period. The growing competition of Germany and 
other nations for the trade both of British and of neutral 
markets, the high tariffs, bounties, and other restrictive 
features of the commercial policy of foreign governments, 
together with a falling-off in the demand for commodities 
owing to the depressed conditions in other countries, had 
limited the outlet for British goods during the four years 
1883-86 and brought about a sharp decline in the foreigr. 
trade of the United Kingdom. 1 The immediate result was 
a large over-production in many lines of British industry 
arising from the failure to adjust the supply of goods to the 
restricted demand. This excess of supply was soon fol- 

1 The falling-off in the foreign trade of Great Britain during the period 
1883-86 may be quickly seen from the following table showing the 



36 



THE CAUSES OF THE PANIC OF 1893 



lowed by a drop in prices and a downward tendency in 
profits. As a consequence, efforts were made to curtail pro- 
duction. Because of the competition of vessel-owners for 
cargoes, which was intensified by the decline in British 
commerce, ocean freight rates during the four years 1883- 
86 were reduced to a point where they were unremunera- 
tive. Ship-building and its allied industries were, therefore, 
discouraged. At the same time lessened activity was evi- 
dent in all other branches of industry. Mines were un- 
worked, iron furnaces went out of blast, and much indus- 
trial machinery was thrown out of employment. Internal 
trade decreased, and the traffic receipts of the railroads 
were greatly reduced. 1 The consequent depression in busi- 
ness and industry during the period 1884-86 affected 
adversely all classes of the population. A considerable 
number of laborers were wholly or partially deprived of 
work, their wages or purchasing power cut down, and 
another factor added to those which had already caused 
a sharp decline in the demand for commodities. Prices 
steadily moved downwards, and profits were reduced to 
a minimum. Obviously, under these conditions investors 
were exceedingly cautious in entering into industrial under- 
takings of any kind, and the new commitments of capital 

imports and exports of merchandise. Statistical Abstract of the United 
Kingdom, 1890, p. 47. 

VALUE OF THE TOTAL IMPORTS AND EXPORTS OF MERCHANDISE 
INTO AND FROM THE UNITED KINGDOM 



Years. 


Imports. 


Exports. 


Total of Imports 
and Exports. 


1883 
1884 
1885 
1886 


£ 
426,891,579 
390,018,569 
370,967,955 
349,863,472 


£ 
305,437,070 
295,967,583 
271,474,308 
268,959,463 


£ 
732,328,649 
685,986,152 
642,442,263 
618,882,935 



1 The gross receipts of the railroads in the United Kingdom from 
merchandise traffic decreased from £38,701,319 in 1883 to £36,370,439 
in 1886. Statistical Abstract of the United Kingdom, 1890, p. 179. 



SPECULATION AND GAMBLING 37 

were small. Funds were allowed to accumulate in the 
banks until more attractive prospects for their investment 
were discovered. 1 

This state of affairs prevailed until the latter half of the 
year 1886, when indications of a trade revival grew gradu- 
ally more and more evident. This upward tendency, how- 
ever, was spasmodic and uncertain, and failed to make 
itself felt in many important branches of industry. Not 
until the following year, when British trade and industry 
received a direct impulse from the United States, was a 
sustained movement toward more prosperous conditions 
inaugurated. 

As a result of the extensive railroad building and the 
industrial revival in the United States during the year 
1887, an unusual demand was made upon Great Britain 
for iron and steel products, woolen goods, and all other 
commodities usually purchased by this country. Up to the 
year 1890, as already seen, the amount of British goods 
thus absorbed by the United States steadily increased. 
During the year 1887 India and the East also took a large 
amount of goods from Great Britain and continued to buy 
heavily during the three subsequent years. Moreover, 
during the period 1887-90 Canada, Australia, South Africa 
and other British colonies, together with the South Amer- 
ican countries, were rapidly building railways and develop- 
ing their natural resources, and their orders for locomo- 
tives, bridges, railroad materials, and capital goods and 
commodities of all kinds were largely placed in the United 
Kingdom. Under these conditions prices grew higher, 
profits were increased, and all branches of British industry 
experienced a steady and prosperous growth. With the 

1 A full account of the condition of British trade and industry during 
the period 1875-86, together with a discussion of the causes of the exist- 
ing depression, is contained in the Report of the Royal Commission on the 
Depression of Trade (6 vols.), 1886. A summary of this report is to be 
found in the Journal of the Royal Institute of Bankers, vol. viii (1887), 
pp. 84-89. See also The Economist (London), Commercial History, and 
Review (annual supplements) for the years 1884 and 1885. 



;{8 TI1K CAUSKS OK Till: PANIC OF 189S 

resultant increase in foreign trade and ocean freight rales, 
ship-building was also revived, and through its demand 

for materials an added impulse was given to the iron and 

steel trade, coal-mining, and oilier subsidiary industries. 1 
During the four years L887 90 the internal trade of Great 
Britain was also active, and railroad traffic and bank-clear- 
ings showed a remarkable expansion, the I <ondon ( Ilearing- 
I louse returns lor L890 being larger than in any previous 

year in its history." Wages were good and labor was fully 
employed. 'I ne entire period ISK7- 90, in brief, w.is marked 
by a heallliy growth in vvcillh and prosperity in Great 

Britain which not only included within its influence all 
branches of trade and industry but which also affected in 
a beneficial way all ranks of society. 

Under these prosperous conditions there was a cpiick 

return of confidence and a rapid extension <>r investments. 

The over-canlions spirit displayed by the investing public 

during the two years L884 85 entirely disappeared after 
the year 1886, ami was superseded by almost the opposite' 
extreme. Industrial stocks of .-ill descriptions were offered 

for sale arid taken with avidity by the public. New lo:nis 

offered by foreign governments were eagerly subscribed for 
and foreign securities were largely accepted in payment 
for the large amount of goods exported from Great Britain 

to the United Stales, South America, Ihe British Colonies, 
and other countries. During the entire period 1887—90, 
the volume of capital commitments by the British public 

1 The total value of British exports and imports increased from £618,- 
822,985 in Ink<» to £748,944,115 in IK!»(). The growth in ship-building 
during the same period may be seen from the fad thai 1 185 vessels, with 
a tonnage of 812,888, wen- constructed in 1890, as compared with 788 
vessels, wild a tonnage of 881,828, built in insd. The total value <>f coal, 
pig-iron, and oilier inehils produced in the I taited Kingdom during L890 
was almost double the amount produced during 1886. 

'The amounts cleared at the London Bankers' Clearing-House 
increased from £5,902,000,000 in 1888 to £7,801,000,000 in 1890. Rail- 
road traffic receipts from merchandise in the United Kingdom increased 
from X:{G,:J70,43S) in 1886 lo X12,SW0,382 in 1890. 



SPECULATION AND GAMBLING 80 

whs ilms increased by additions from every available 
source both at home and abroad.! 

Unfortunately, a large part of these new capital commit- 
ments was not placed in safe and conservative undertak- 
ings. The steady improvement in trade and industry, in 
addition to inspiring the country wiih fresh confidence, 
hud created very favorable conditions for floating new 
loans and promoting financial and industrial enterprises. 
Money was plentiful and obtainable from the banks on 
easy terms. 9 On account of the prosperous condition of 
affairs, a considerable percentage of the population, in- 
cluding even the laboring classes, had been able to accumu- 
late savings which they were eager to place in some remun- 
erative investment. Moreover, the successful conversion 
of the national debt of Great Britain during the year ihhh 

had produced a, considerable decline in I lie rale of interest 

on all first-class securities, and had stimulated the appetite 

of the public for new in vestments. Parliament also had 

under consideration a legislative measure for the reform 
of Mi*- Companies Act of 1862. Promoters were eager, 
therefore, to hurry forward new undertakings, in order to 
take advantage of the facilities of the existing law. 8 Their 
activity in forming and offering new enterprises to the 

public was met by an increased power and desire on Im- 
parl of the public to subscribe for them. The result soon 

became evident in a departure from llie usual standards 
of investment. The appearance of this tendency was coin- 
cident with the revival of trade during the latter half of 
1HH(>. During the subsequenl period of four years, it de- 
veloped into a widespread speculative movement which 

embraced many enterprises of a questionable character. 

1 "Our New Investments in ihoo," The Economist (London), Decern 
ber27. lH<m, pp. [627 28. 

2 The average minimum rate <>r discount charged by the Bank of 
England was 8$ per cent for Ikk7, 8J for ihhh, and :U for ihk<). During 
many months of these years the rale dropped as low as 2 per cent. 

3 "New Loans and New Companies fox ihhh," The Economist (Lon- 
don), vol. xlvi (December h, ihhh). 



40 



THE CAUSES OF THE PANIC OF 1893 



The first evidences of speculation became manifest in a 
mania for organizing private business concerns into joint- 
stock companies. During the year 1886 alone 110 such 
conversions were made. This movement gained strength 
during the following year, and by 1888 it had developed 
into a craze, which continued throughout 18S9 and the 
first seven months of the year 1890. During the entire 
period 1886-90, 12,068 new joint-stock companies were 
registered in Great Britain, with a total nominal share 
capital of more than one billion pounds. The number of 
companies registered each year, together with their nominal 
capitalization, was as follows : l 

COMPANIES REGISTERED IN THE UNITED KINGDOM DURING 
THE PERIOD 1SS6-1S90. 



Years. 


Total Number of 
Companies. 


Total Nominal Share 
Capital. 


1886 
1887 
1888 
1889 
1S90 


1.891 
2.050 
2,550 

2.788 
2,789 


£ 
145.850.702 
170,172,674 
858,781,594 
236,520,674 
234,563,287 


Total 


12,068 


1,140.8S8,881 



Some of these new companies represented legitimate 
industrial undertakings. Others were of a more or less 
uncertain character, and were the outcome of the over- 
confident and optimistic attitude of promoters. The con- 
version of private breweries into joint-stock companies 
was typical of the latter class of ventures. During the four 
years 1887-90, the activity of promoters in this direction 
overran all reasonable bounds. New brewery companies 
were organized, and private concerns which were already 
doing business in Great Britain were combined into large 
corporations. Moreover, during the two years 1889-90, 
1 Statistical Abstract of the United Kingdom, 1890, p. 183. 



SPECULATION AND GAMBLING 41 

the movement was extended to include similar companies 
which purchased and operated breweries in Canada, the 
United States, South America, South Africa, and other 
foreign countries. As a result of these promotions the 
element of good-will and the prospective earning power 
of the business in the future were heavily capitalized. 
Most of the companies, in fact, were floated under condi- 
tions of over-capitalization and a large proportion of the 
stock issued went into the hands of promoters and under- 
writers and other persons aiding in the organization. De- 
spite this fact, these speculative securities were eagerly 
taken by the public, and in many cases during the early 
development of the movement the allotment of stock for 
sale was over-subscribed. During the entire period 1887- 
90, more than £100,000,000 worth of brewery stocks was 
absorbed by British investors and speculators. 1 

The speculative movement, however, included com- 
panies of a much more doubtful character than the brewery 
flotations. Millions of pounds were subscribed for a multi- 
tude of diverse undertakings, the prospects of which in 
most cases were decidedly questionable. Companies were 
even organized to promote, underwrite, and speculate in 
the stocks of other companies. These concerns were popu- 
larly termed "trust and investment companies." Their 
capital stock was issued in small shares, and the effect of 
their organization was greatly to encourage speculating 
and gambling among persons of limited means. Many of 
them were organized for general speculative purposes, and 
their power of selecting and acquiring stocks was unre- 
stricted. Others were floated for the purpose of dealing in 
special securities, such as municipal gas and water com- 
panies, Spanish and South American railway issues, or 

1 This estimate is based on the returns given The London Economist 
in its annual reviews of commerce and finance. For a full account of the 
movement for converting breweries into joint-stock companies, see an 
article entitled " Brewery Companies as Investments," The Economist, 
vol. xlviii, September 6,"l890, p. 1137. 



42 THE CAUSES OF THE PANIC OF 1893 

mining and other stocks. The greater number of these 
investment companies, however, relied principally for their 
gains on the promotion and underwriting of new compa- 
nies. The public was deluded by the issue of prospectuses 
which contained alluring descriptions of new ventures, 
and in which reputable business men, peers, and members 
of Parliament were paraded as directors. 1 This policy 
during the time of active demand for investments met 
with large profits, since there seemed to be no limit to 
the credulity of the public. On the other hand, it was 
evident that if for any reason there should be a decline in 
the support of speculators and investors, heavy losses would 
be encountered, for the reason that the funds of the trust 
companies would be tied up in a large mass of undigested 
securities which the public would refuse to absorb. 2 

Great activity was thus displayed during the period 
1887-90 in promoting financial and industrial undertakings 
of a speculative character, the prospects of which were 
based upon the future conditions of industry and trade in 
the United Kingdom and the more advanced commercial 
nations. The main current of speculation, however, turned 
toward the backward and newly opened countries of the 
world, where the risks of investment were undoubtedly 
greater, but at the same time the hope of reward corre- 
spondingly high. During the two years 1887-88, a land 
boom which had its origin in a silver-mining craze was in 
progress in Australia. As a result of appeals for support, 

1 "Some of them [members of Parliament] got their living by this 
participation in new companies. In the directory of joint-stock com- 
panies it may be seen that 26 members of the House of Commons were 
directors in 213 companies; 23 members of the House of Lords were 
directors in 122 companies, of which 85 pay dividends, 26 have no net 
income, and 11 were new in January, 1890. One member of the House 
of Commons estimated that during the three years 1887-89 180 millions 
had been drawn from the pockets of investors by the bubbles." " The 
Crisis of 1890," Max Wirth, Journal of Political Economy, vol. i (March, 
1893), p. 230. 

2 " New Securities offered in London in 1889," The Economist, vol. 
xlviii (December 14, 1889). 



SPECULATION AND GAMBLING 



43 



the British public invested large sums in Australian mines. 
Investment and financial companies were also organized 
to speculate in Australian real property and mortgages. 
During the period 1886-90, many new companies of doubt- 
ful prospects were also launched in Great Britain for the 
purpose of exploiting Chilean nitrate deposits. Moreover, 
mining ventures in foreign countries came in for a' large 
share of speculation. 1 During the five years 1885-89, 
1386 companies, showing a nominal capitalization of 
£181,569,545, were registered in Great Britain for the pur- 
pose of exploring and developing mineral lands. 2 Of this 
class of flotations gold-mining issues were the most numer- 
ous. The volume of gold-mining shares offered for sale and 
absorbed by the public increased each year. From the 
accompanying table, showing the geographical distribution 
of gold-mining ventures registered in Great Britain during 
the three years 1887-89, it will be seen that Africa supplied 





1889. 


1888. 


1887. 


Countries. 


No. 


Nominal 


No. 


Nominal 


No. 


Nominal 




of 


Capitaliza- 


of 


Capitaliza- 


of 


Capitaliza- 




Cos. 


tion. 


Cos. 
79 


tion. 


Cos. 


tion. 


Britain 


58 


£3,100,400 


£5,836,325 


63 


£3,476,200 


Europe 


32 


2,252,850 


45 


6,556,070 


23 


1,736,000 


Asia 


17 


1,913,100 


14 


1,785,000 


9 


1,562,511 


Africa 


145 


16,651,975 


73 


10,533,205 


42 


4,760,500 


N. America 


66 


9,390,200 


84 


16,531,000 


67 


12,298,830 


S. America 


32 


4,658,400 


31 


6,858,600 


13 


2,660,000 


Australia 














New Zealand 


28 


3,048,500 


39 


4,563,200 


52 


7,508,000 


Total 


378 


41,015,425 


365 


52,663,400 


269 


34,002,041 



1 For a more complete discussion of the activity of British speculators 
in promoting companies to operate in new and undeveloped countries, 
see "The Crisis of 1890," by Max Wirth, Journal of Political Economy, 
vol. i (March, 1893), pp. 225-26. Also " Speculation in Australia and 
Effect on England," The Economist (London), vol. xlvii (May 5, 1888), 
pp. 564-65. 

2 "The Growth of Speculation in Mining Shares," The Economist 
(London), vol. xlviii (January 11, 1890), p. 369. 



44 THE CAUSES OF THE PANIC OF 1893 

more than twice as many projects of this character as any 
oilier division of the globe. 1 

The greater majority of the South African gold-mining 
companies were floated at high prices by promoters and 
underwriters who, by a manipulation of ihe markets in 
South Africa and London, derived large profits from their 
sale. The shares were generally quoted at small amounts, 
usually at less than one pound each, and when the com- 
panies were not officially recognized by being listed on the 
London Slock Lxchange, their stocks were offered for sale 
by outside operators. As in the case of Ihe investment com- 
panies, every facility was furnished to persons of small 
resources to gratify their gambling proclivities. Large 
amounts of stock were absorbed by the public, and under 
the stimulus of heavy speculation premiums on shares rose 
to an unreasonable height, ranging from 50 to 5000 per 
cent." During llie same years that this gambling in mining 
shares was in progress, a similar movement, equal in inten- 
sity but less widespread in its influence, was also maintained 
in South African diamond properties. 8 Furthermore, in 
the autumn of 1880, when the public seemed inclined to 
lessen its commitments in gold-mining and diamond shares 
until a larger measure of the brilliant promises of the pro- 
moters had been brought to fruition, professional opera- 
tors turned their attention to the flotation of land prospect- 
ing and exploration companies. As a consequence, a large 
portion of the speculative public, in defiance of reason and 
Common sense, followed their lead, and the gambling in 
African securities continued, but with abated force, during 
the first half of the year L890. 

1 The London Economist. Unfortunately figures axe not available for 
showing the Dumber of companies of local origin, the shares of which 
came in for the largest amount of speculation. The above table, although 
ii falls short of giving the I rue condition of affairs, furnishes sufficient data 
as id ilir magnitude of the speculation in African gold-mining stocks. 

"The South African Diamond Industry," The /■'.conoiuist (London), 
vol. xlv (March l(), ISSS), p. ll>. 

3 "African Prospecting ( ompanics," The Economist (London), vol. 
xlvii (October '2(5, 1881)), p. 1538. 



SPECULATION AND GAMBLING 45 

But British promoters and speculators did not confine 
their operations i<> Africa and Australia. The countries <>f 
South and Central America canic in for an even greater 
share of exploitation. Mention has already been made of 
Chilean nitrate companies. As a result of the policy of 
British exporters, during l Ik* period 1887 90, in accepting 
payment of trade balances in foreign securities, railroad 

projects in Uruguay, Chile, Mexico, ;iii<l Brazil were also 

largely supported by British capital. The outlay in these 
countries, however, was insignificant in comparison with 
British capital commitments in Argentina. As early as the 
year 1875, the attention of Europe had been attracted by 
the prospect of securing large profits from ihe development 
of the rich natural resources of the River Plate territory. 
Owin^ to the unsettled conditions <>f political affairs in 

Argentina, however, and Ihe cautious spirit which pre- 
vailed among European investors, no decisive steps were 
taken in that direction until the early eighties, when an 
extended boom in land values had its inception in the 
southern provinces of that country. 

The boom in land values in Argentina was the direct 

outcome of ihe reclamation <>r large tracts of rich territory 
from the southern Indian tribes by a series of Government 

expeditions extending through the years 187(5-80. ' In 

1 At Hie time of the advent of the Avellinda-Alsine party to power in 
Argentina in ls7<>, Indian tribes reigned supreme overtlie vast areas of 
territory which extended from the southern boundary <>r the province 
of Mendoza to the Straits o!' Magellan. The Minister of War, Alsine, 
organized expeditions against them for the purpose of driving them 
southward and thus preventing their foraging trips into the settled re- 
gionsof the country. Alter the death of Alsine in lN78,a, regular war was 
organized against the Indians and those who escaped death or slavery 
were swept into Patagonia. As the result of this policy, the Government 
soon found itself in possession <>l a large extent of territory, for the 

exploitation of which it desired to attract capital and labor. 

An excellent account of this period in Hie linaneial history of Argen- 
tina is to he found in an article entitled " Argentina — I I«t Past and Pre- 
sent," l>y John Proctor, The Bankers' Magazine (London), vol. li (March, 
18!)'), pp. 461-65. See also Spanish American Republics, Theodore 
Child (New York, 18!)1), pp. 32(5-42. 



46 THE CAUSES OF THE PANIC OF 1893 

order to facilitate the occupation of these lands, the Argen- 
tine Government offered liberal terms to purchasers. The 
payment for lands taken up were allowed to extend over 
a series of years, the title being given on the receipt of a 
certain sum down. Notes of the purchaser were accepted 
for the outstanding amount. To provide capital for the 
development of the land an additional scheme was devised, 
consisting of a system of National and Provincial Mort- 
gage Banks. 1 These banks acted as intermediaries or 
agents between landowners wishing to mortgage their 
property and people who were willing to lend their money 
on landed security. The landholder who wished to secure 
a loan deposited his titles at a mortgage bank and the bank 
made a valuation of his estate, and cedulas or bonds of the 
bank were then issued to the landowners up to half the 
value of his property. These bonds carried a certain rate 
of interest for which the landowner was responsible until 
his titles were redeemed by an annual rate of amortization 
of the amount borrowed from the bank. Funds were real- 
ized by the landowner through the sale of the bonds or 
cedulas in the open market. The payment of the interest 
charges was guaranteed to the purchaser by the banks, 
and the ultimate redemption of the bonds was guaranteed 
by the state and provincial governments. Persons who 
were non-residents, and who had no means of verifying 
the security of any particular land investment were thus 
enabled to become lenders on Argentine real estate. 2 

In outward form, this was a most useful scheme, and 
cedulas were to all appearances as sound securities of their 
kind as could have been devised. The system had many 
serious defects, however, and the sequel showed that its 
adoption amounted almost to a curse to the country 
through the stimulus it gave to insane land speculation. 

1 The National Mortgage or Hypothecary Bank was operated by 
the National Government; the Provincial banks were under the control 
of the Government of the Province of Buenos Ayres. 

2 " The Argentine Crisis — Its Development," Henry B. Collander, 
The Fortnightly Review, vol. liv (1899), p. 441. 



SPECULATION AND GAMBLING 47 

Persons who could get together a sufficient amount to 
pay the first installment on the land purchased from the 
Government, secured their titles, which they then pledged 
to the mortgage banks for as large an amount as they could 
obtain. With these funds payments were made to cover 
further installments on the land as they fell due, until the 
land could be sold at an enhanced price consequent upon 
the general rush for land investment. The original pur- 
chaser then moved onward and repeated the same opera- 
tion. As a result, land constantly rose in value, and as no 
restriction had been placed on the power of the banks to 
issue cedulas, loans were freely made on a boom basis. 

In the second place, the legitimacy of the cedulas issued 
presupposed rigorous honesty on the part of the banks and 
the Government. As a matter of fact, however, Argentina 
was honeycombed with corruption. A coterie of politicians 
and their henchmen had complete control of the national 
and provincial governments, and under the guise of politics 
carried on a scramble for loot. It was therefore an easy 
matter for a supporter of the party in power, or a member 
of the political ring, to obtain loans on worthless property. 
Fraudulent and fictitious valuations were made by the 
banks and large amounts of the cedulas issued rested upon 
no real basis of value. 1 

The issues of national and provincial cedulas up to the 
year 1887 were comparatively moderate. After that date, 
under the combined influence of private speculators, Gov- 
ernment officials, and politicians, the land boom was rapidly 
extended and clever financiers found a market for the sale 
of cedulas in Great Britain and on the Continent. Foreign 
investors seemed to be seized with a mania for this form of 
security. Series after series, from A to P, were issued by the 
banks and quickly absorbed by credulous Europeans, who 
were ignorant of the true state of affairs and who argued 

1 " Gaucho Banking," W. R. Lawson, The Bankers' Magazine (Lon- 
don), vol. li, January, 1891, pp. 33-52. 



48 THE CAUSES OF THE PANIC OF 1893 

that the cedulas were a better investment than Government 
bonds for the reason that in addition to the guarantee of 
the state and provincial governments they were backed up 
by real estate. 1 

European investors, however, did not limit their activ- 
ities to the purchase of cedulas. The Argentine Government 
was besieged by European promoters and financiers for 
concessions to construct railroads, docks, waterways, 
municipal improvements, and every description of public 
enterprise. Many of these projects were undoubtedly of 
a legitimate character, and necessary to the development 
of the country. But the movement in this direction soon 
exceeded all reasonable bounds. Railroads were built 
which could not pay operating expenses for years to come. 
Other industrial undertakings were entered into under 
the allurement of the existing inflation in values and the 
prospect of the country's growth in wealth and population 
in the future. Public works of all kinds were also con- 
structed without taking into account the real wealth and 
taxpaying power of the community. The fever of specula- 
tion, in short, arising from the inflation of land values soon 
developed into an insane rush for wealth, and with the 
growth of confidence in Argentine resources European 
capital was literally poured into the country. 

In addition to the private commitment of capital by 
foreign investors, the Argentine Governments also, as a 
result of the demand for public works and of the govern- 
mental policy of guaranteeing interest charges on railroads 
and other industrial projects, soon found it necessary to 
largely increase their indebtedness. The national and pro- 
vincial administrations negotiated loans by the dozen 
through European financial houses. Many municipalities 
also tried their hand at extracting from the foreigner the 

1 As early as April, 1888, the cedulas issued amounted to 47,957,000 
pounds. By the year 1890 the face value of cedulas outstanding was 
equal to 400,000,000 currency dollars, of which amount about one half 
was held by foreign investors. 



SPECULATION AND GAMBLING 49 

funds from which he was so willing to part. During 
the three years prior to 1886, various loans effected by 
the Argentine Republic in European countries had never 
exceeded an annual total of £7,000,000 and were generally 
much below this amount. The total borrowings in 1886 
rose suddenly, and during the three subsequent years 
reached unprecedented figures. 1 The extent to which 
public borrowing was carried may be seen from the fol- 
lowing estimate of the total loans during the period 
1886-89: 

TOTAL OF LOANS NEGOTIATED BY ARGENTINA, 1886-1889. 



1886 


£13,500,000 


1889 


£29,000,000 


1887 


14,500,000 


1890 


5,000,000 


1888 


36,000,000 


Total 


98,000,000 



The negotiation of these loans had a twofold effect. In 
the first place, the funds realized furnished a further incen- 
tive to Government extravagance and official corruption. 
In the second place, they gave an additional impulse to the 
existing speculation. To make matters worse, the country 
was soon plunged into the evils resulting from a greatly 
depreciated currency. 

Specie payments in Argentina had been suspended in 
1885. Two years later an attempt was made in the Free 
Banking Law of 1887 to put the currency of the country 
on a uniform basis, by the adoption of a national banking 
system modeled after that of the United States. The head 
of this system was the National Bank at Buenos Ayres, with 
branches located in the various provinces. These banks 
were authorized to create a paper circulation, and to guar- 
antee the notes thus issued the banks were required to pur- 
chase from the Government national bonds. The pay- 
ments for these bonds were to be made in gold, which was 
to be kept in the Treasury as the ultimate security of the 
currency issued by the banks. In compliance with the law, 
millions of dollars in gold were imported by the provincial 

1 The Bankers' Magazine (London), vol. li (March, 1890), p. 459. 



50 THE CAUSES OF THE PANIC OF 1893 

banks and duly paid into the National Treasury as a guar- 
antee of their note issues. The National Government kept 
the gold for about a year, when, in defiance of the banking 
law, the fund was used for the payment of Government ob- 
ligations. As soon as gold began to leave the Treasury 
the premium on that metal went up by leaps and bounds. 
Additional apprehension over the currency situation was 
also caused by the fact that even Government officials could 
not give an accurate account of the amount of notes which 
had been issued by the banks. It was stated to be between 
250 and 300 million dollars, but these estimates were soon 
invalidated by the discovery that illegal issues of millions 
had been made by both national and provincial institutions. 
Under these conditions the premium on gold during the 
two years 1888-89 advanced from 50 to 250 per cent., and 
during the year 1890 practically remained at the latter 
figure. The Government endeavored to prevent the depre- 
ciation of paper issues by declaring a forced currency, but 
this action only served to stimulate further speculation in 
gold. The resultant variations in the currency affected the 
interests of every one financially concerned in the develop- 
ment of the country, and especially the holders of cedulas 
and other securities which were payable in currency dollars. 
These dollars after the dissipation of the gold guarantee 
fund had no real basis of value, and the finishing touches 
were thus given to cedulas as a wildcat security. 

The financial orgy in Argentina during the period 1887- 
90 had thus developed to a point where the country was 
burdened with an immense circulation of inconvertible and 
depreciated paper currency, an excessive and fraudulent 
issue of cedulas, and a large public indebtedness. The 
significant feature of these various forms of Argentine 
liability, so far as our story is concerned, was the fact that 
they were principally in the hands of foreign investors. 
The enormous amount of foreign capital invested in the 
country is at once apparent from the following statement, 



SPECULATION AND GAMBLING 



51 



showing the principal items of Argentine indebtedness held 
abroad in 1890 : * 

ARGENTINE LIABILITIES ABROAD, 1890. 



Gold Dollars. 



Currency 
Dollars. 



National Debt 

Provincial 

Municipal 

Cedulas (say) 

Railways 

Miscellaneous and Private Investments 



Gold liabilities in currency, at 300 
gold premium 



122,283,000 

193,500,000 

23,600,000 

250,000,000 
200,000,000 



200,000,000 



789,443,000 



200,000,000 
,368,329,000 



Total liabilities in currency. 



2,568,329,000 



The total indebtedness of Argentina in 1890, both at 
home and abroad, was as follows: 

TOTAL ARGENTINE LIABILITIES, 1890. 



National Debt 

Provincial 

Municipal 

Cedulas 

Railways 

Miscellaneous and Private Investments 



Gold liabilities in currency, at 300 
gold premium 



Gold Dollars. 



300,000,000 

195,500,000 

23,660,000 

250,000,000 
200,000,000 



967,160,000 



Total liabilities in currency 



Currency 
Dollars. 



1,153,000 
13,600,000 

400,000,000 



414,753,000 
2,901,480,000 



3,316,233,000 



The greater part of this Argentine foreign indebtedness 
of over one thousand million dollars (in terms of gold) 

1 " The Argentine Crisis — Its Financial Significance," by W. R. 
Lawson, The Fortnightly Review, vol. liv (September, 1890), p. 459. 



52 



THE CAUSES OF THE PANIC OF 1893 



was held in Great Britain. The appearance of specula- 
tion in Argentina, as already noted, had been coincident 
in point of time with the outgrowth of speculative tenden- 
cies in the United Kingdom, and the two movements had 
subsequently run parallel with each other. Consequently 
a steadily increasing volume of investment funds passed to 
the River Plate through British banks, finance companies, 
and private channels. Reputable financial houses in Great 
Britain, like the old established firm of Baring Brothers, 
underwrote Argentine public loans and disposed of them to 
the British public. Thirteen Argentine provinces during 
the period 1886-90 exploited their credit in London to the 
extent of £38,700,000, the National Government negotiated 
loans amounting to almost .£25,000,000, and Argentine 
municipalities floated about £5,000,000 of their securities 
in London. British investors also placed between forty and 
sixty million pounds sterling in Argentine railroad projects, 
and a similar amount in miscellaneous investments. 1 

The grand total of British capital commitments in 
Argentina, therefore, reached an immense figure. Con- 
sidered in connection with the concomitant speculation at 
home and in South Africa, the enormous extent of the 
British speculative movement during the four years 1887- 
90 is clearly evident. Its magnitude may be more clearly 
realized from a summary statement of the total capital com- 
mitments in Great Britain during this period : 2 

TOTAL CAPITAL COMMITMENTS IN GREAT BRITAIN, 1887-90. 





1890 


1889 


1888 


1887 


1st Quarter 

2d 

3d 

4th 


£30,243,000 
59,510,000 
39,103,000 
13,709,000 


£56,846,000 
49,866,000 
34,526,000 
48,198,000 


£34,691,000 
74,957,000 
22,951,000 
27,570,000 


£28,599,000 
35,535,000 
16,059,000 
17,873,000 




142,565,000 


189,436,000 


160,169,000 


158,066,000 



1 " The Argentine Crisis — Its Financial Significance," by W. R. 
Lawson, The Fortnightly Review, vol. liv (September, 1890), pp. 448-51. 

2 "Our New Investments in 1890," The Economist (London), vol. 
xlviii (December 27, 1890), pp. 1627-28. 



SPECULATION AND GAMBLING 



53 



Great Britain had thus invested a large percentage of the 
increased wealth which had accrued from her prosperity 
in trade and industry during the four years 1887-90 in 
enterprises of a speculative character. In addition there 
had been a large expansion of credit, in which many of 
the transactions had been of an abnormal character based 
upon inflated and speculative values. Financial houses had 
underwritten large amounts of securities and relied upon 
their sale to the public for reimbursement. Individual 
investors, in many instances, had not only placed their 
savings in questionable investments, but had also used se- 
curities of doubtful value as collateral for loans with which 
to continue their speculating operations. A stimulus had 
been given to this movement by the joint-stock banks, 
which had followed the policy of loaning at a moderate 
rate up to a reserve-point of 10 or 12 per cent, of their 
liabilities, and then depending upon the Bank of Eng- 
land for any funds which might be needed to replenish 
their reserves. 1 On account of this action upon the part 
of the joint-stock banks, the Bank of England could 
not retain its holdings of gold, and oftentimes found it 

1 The following summary statement of some of the strongest joint- 
stock banks at the end of December, 1890, shows the smallness of their 
cash reserves as compared with their liabilities. 



London and Western 

Union 

London Joint-Stock 

City 

London and Southwestern 

London and County 

Imperial 

Alliance 

Consolidated 



Liabilities to 
Public. 



£ 

26,958,600 

16,809,700 

14,155,100 

9,677,300 

4,897,600 

39,296,100 

4,251,000 

5,403,300 

3,789,800 



125,238,500 



Cash in 

Hand and at 

Bank. 



£ 

3,984,200 

2,814,400 

1,165,700 

783,300 

721,800 

4,981,700 

421,600 

594,300 

621,300 



16,088,300 



Proportion, 
of Cash to 
Liabilities. 



% 

14.8 
16.8 

8.1 

8.1 
14.8 
12.7 

9.9 
10.9 
16.3 



12.9 



54 THE CAUSES OF THE PANIC OF 1893 

necessary to raise the rate of discount for the purpose of 
securing an increase in the gold supply. As a result 
of the excessive speculation the credit transactions of 
the United Kingdom finally increased beyond a safe pro- 
portion to the gold reserves. On December 31, 1889, the 
directors of the Bank of England were forced to raise 
the rate of discount to six per cent. As a result of this 
decisive action, the speculation movement was greatly 
curbed and a great many bubbles collapsed at their incep- 
tion. There was no thorough purging of the financial sys- 
tem, however, and it was clearly evident that any further 
shock to confidence might result in a fall in values and great 
losses. In the event of such a forced liquidation, it was 
extremely doubtful whether the real values which under- 
lay the speculative movement would sustain the fabric of 
credit which had been reared upon them. 



CHAPTER IV 

INDUSTRIAL AND FINANCIAL CONDITIONS IN FRANCE AND 
GERMANY, 1884-90 

Trade and Industrial Depression in France, 1884-87. — Return of Prosperous 
Conditions in 1887, and the Organization of the Copper Syndicate. — Failure 
of the Copper Syndicate and the Soctete" des MeHaux. — Suspension of the 
Comptoir d'Escompte. — Absence of Speculation in France, 1889-90. — The 
Spread of Speculation from Great Britain to Germany. — German Capital 
Commitments in Argentina. — The Joint -Stock Company Mania. — The 
Threatened Danger of a Panic averted by the Reichsbank. — Financial 
Situation in March, 1890. 

The financial and industrial history of France during the 
period 1884-90 did not show any features in common with 
the course of affairs in Great Britain. By the year 1880 
France had so fully recovered from the Franco-Prussian 
war that stock-jobbing and other forms of reckless specu- 
lation flourished in Paris. This movement came to a head 
during the year 1882 in a disastrous financial breakdown, 
and the resultant liquidation was attended by much loss 
and the uncovering of many corrupt financial practices. 
A lack of confidence and activity in business and industrial 
undertakings followed. This fact, together with the exist- 
ing depression in other countries, strongly influenced the 
subsequent course of French industry and trade, and it 
was not until the year 1887 that signs of relief from the 
continuous period of stagnation began to make themselves 
evident. 

The revival in trade and industrial enterprise was fol- 
lowed by more prosperous conditions. Unfortunately, in- 
vestors and promoters were unable to confine their energies 
to proper channels. To the legitimate activity in financial 



56 THE CAUSES OF THE PANIC OF 1893 

and industrial circles there was soon added a gigantic 
scheme for speculating in the price of copper. 

As a result of the discovery of the copper deposits on 
Lake Superior and in other regions of the United States 
and South America, and the reopening of the Rio Tinto 
mines in Spain, the world's supply of copper had been 
enormously increased. The price, therefore, had steadily 
fallen. 1 French capitalists had obtained control of the 
Rio Tinto Company, and, under their management it had 
become very prosperous. The Societe des Metaux, a com- 
pany formed with the support of the Comptoir d'Escompte, 
also dealt extensively in copper. 2 The directors of the 
Societe des Metaux, being led astray by the success of the 
diamond operations in South Africa, sought to monopolize 
the sale of copper. Under their direction a syndicate of 
speculators was formed which attempted to control the 
copper market by buying the entire output of the mines at 
a fixed price. Contracts were made with the principal 
copper works of the world, which agreed for the space of 
three years to sell all their copper to the syndicate at ,£70 
per ton, the copper ring then raising the price to £80 per 
ton. These contracts involved the purchase of 150,000 
tons of copper per year, or an annual outlay of 262,500,000 
francs. In addition, the syndicate, in order to successfully 
control the supply, had to buy the output of mines which 
had refused to contract with it. 

During 1888, the first year of the copper ring's operation, 
it found its object frustrated by several factors to which it 
had not given sufficient consideration in forming its plans. 
In the first place, the supply of copper, under the stimulus 
of higher prices, was greatly increased. New supplies of 
the metal came into the market from every direction to 
profit by the high prices, the world's production of copper 

1 Before 1870 the price of copper had ranged from 2000 to 2500 francs 
per ton. In 1887 it was below 1000 francs. 

2 In the autumn of 1887 the Societe des Metaux, with the aid of a 
group of financiers, conducted a successful corner it} Chile bars. 



CONDITIONS IN FRANCE AND GERMANY 57 

in 1888 being 500,000 tons greater than the preceding 
year. In the second place, people would not buy copper 
at the enhanced prices. In many cases old copper was 
used by manufacturers. Wherever possible iron and steel 
were substituted. Moreover, copper dealers would not 
replenish their stocks. As a consequence of this limitation 
of demand in the face of an increase in the supply, the 
copper speculators, in order to maintain the high level of 
prices, found it necessary to hoard their supplies of copper 
and purchase a great amount of the outside production. 
At the beginning of March, 1889, the syndicate held, in 
various parts of the world, 160,000 tons of copper. 

In accumulating this amount not only the resources of 
the Societe des Metaux had been exhausted, but even the 
entire capital and part of the deposits of the Comptoir 
d'Escompte, which had rendered assistance to the copper 
speculators. 1 This institution had also guaranteed the 
contracts of the Societe des Metaux for two years. When 
the insolvent condition of the bank became known early in 
March, through the attempted withdrawal of the Russian 
Government deposits, other depositors endeavored to with- 
draw their funds, and a general run upon the Comptoir 
d'Escompte and two other Paris banks was precipitated. 
The leading bankers of Paris advanced 25,000,000 francs, 
but this sum was not sufficient. Finally the Bank of France 
took over the assets of the Comptoir d'Escompte, and, in 
order to prevent a general financial panic, advanced 
100,000,000 francs toward meeting its liabilities. In the 
mean time, the copper syndicate found itself without means 
to absorb the increasing supply of copper. Consequently it 
could not keep its contracts, and the large producers began 
to sell in the open market. The price of copper, therefore, 
quickly moved downwards. Under these conditions the 

1 The Comptoir d'Escompte had involved in the copper speculation 
not only its capital of 80,000,000 francs, but even its reserve funds of 
20,000,000 francs. 



58 



THE CAUSES OF THE PANIC OF 1893 



copper speculators sustained great losses. The Soeiete des 
Meiaux could not meet its obligations. Finally, during 
the latter part of March, 1889, it was forced to suspend 
payments, and the shareholders lost all their capital. 

Two months previous to I he failure of the Comptoir 
d'Escompte and the Soeiete des Metaux, work had been 
suspended on I he Panama (-anal, and the canal company, 
which had absorbed I .'$()() million pounds of French capital, 
was forced into liquidation. As a result of these two almost 
simultaneous financial catastrophes, France was deterred 
from entering into the speculative activity which was so 
prevalent in England during the period 1888-90. These 
years were spent by France in putting her financial house 
in order, and wen* marked by the endeavor to liquidate 
past excesses and recuperate past losses. The French 
people were very cautious in entering into new enterprises 
of any kind, and only a small amount of Argentine issues 
or other securities of a doubtful character were absorbed by 
French investors. Consequently there was no inflation 
of values, and the cash reserves wen- ample in comparison 
will i the credit transactions of the country. This fact is 
apparenl from the condition of the Bank of France during 
the period : ' 

HANK OF FRANCE, 1886-90. 



First 

weefc 


AsHICTS. 


Liabilities. 


Janu- 
ary. 


Coin and 
Bullion. 


Discounts 
;md Ad- 
vances. 


Circulation. 


Government 
Deposits. 


Other. 


IKSO 

I8S7 
ISSS 
IKS!> 

L890 


£ 
89,344,000 
94,] l7,(ioo 
91,905,000 
89,288,000 
L00,155,000 


£ 
55,77 1 ,ooo 
58,014,000 
52,703,000 
59,190,000 
60,419,000 


116,542,000 
1 15,101,000 
1 13,588,000 
l L0,606,00Q 
126,209,000 


£ 
3,250,000 
9,238,000 
6,006,000 
9,650,000 
12,818,000 


£ 

10,107,000 
14,410,000 
15,278,000 
17,588,000 
13,112,000 



1 During the period 1885 90 the trade :m<l industrial situation in 
Austro-Hungary gave no indication <>f unusual activity, owing to the fact 
thai the country bad never fully recovered from the evil effects of the 



CONDITIONS IN FRANCE AND C HUM ANY 59 

The situation in Germany, however, was entirely differ- 
ent from that in Franco. The speculating movement at its 
very outset was communicated from London to Berlin, 
and after the year 1887, although the German capital 
commitments were not so great in amount, the gambling 
mania was as prevalent in Germany as in Great Britain. 
As early as 1886 Argentina began !<> exploit its credil in 
Berlin, and during the three subsequent years a consider- 
able amount of Argentine loans were issued at good prices, 

through the Deutsche Bank and the Disconto-Gesell- 

scli.il't. The amount and description of Argentine public 
securities thus floated in Germany during the period 
1886-89 appears in the following summarized form: 1 

ARGENTINE LOANS ISSUED IN GERMANY. 

6 per cent, loan of the Province <>f Buenos Ayres, issued Oc- 

tober 12, 1886, at so! per cent $12,511,432 

5 per cent, gold loan of 1886, issued August 25, 1887, at 90 

per cent 10,291,000 

4£ per cent, loan of 1888, issued October 16, 1888, at 85.80 

per cent 19.7G9.500 

4* per cent, exterior loan, issued February 20, 1889, at 90 

"per eenl 27,000,000 

4$ per cent, loan of the City of Buenos Ayres, issued May 1, 

1889, at 86 per cent 9,920,000 

The German people were trained to look upon Argentine 
loans as first-class securities, and many small investors 
bought them. Large amounts of oilier Argentine paper, 
such as cedulas and railroad stocks and bonds, were also 
purchased. Moreover, German banking houses, led by the 
Deutsche Bank, established branches in Argentina and 
extended credits lo Argentine banks. 2 

The public became uneasy in 1888, however, over the 

future of Argentine finances, and during the following 

crisis of IS7:5. Austro-I I ungary was also more of a del dor than a creditor 
nation, and consequently was not. in a position to indulge in the specu- 
lative activity which had been a marked feature of the years 1887-90 in 
Great Britain. 

1 The Economist (London), vol. xlviii (November 29, 1890), p. 1511. 

2 The Deutsche Bank was a partner in the I'chcrsec Hank at Buenos 
Ayres; the l)isconto-( Jesellschaft was also a partner in the l)u Barry 
banking concern of Buenos Ayres and Antwerp. 



60 



THE CAUSES OF THE PANIC OF 1893 



year Germany was a heavy seller of Argentine securities. 
The volume of Argentine paper which still remained in 
the hands of German investors at the close of the year 
1890 was estimated at about 100,000,000 marks. 1 These 
securities were principally held by small investors who 
were scattered over the country. 

But whatever evils of speculation Germany escaped 
through her distrust of Argentine securities were more 
than equaled by her gambling in industrial shares. After 
the year 1888, when Argentine issues first began to be 
looked upon with suspicion, German operators turned 
their attention toward the promotion of financial and 
industrial enterprises. Precisely as in Great Britain, this 
movement soon developed into a mania for the organiza- 
tion of joint-stock companies. During the period 1886-90, 
1061 new companies were floated, with a total capitaliza- 
tion of more than 1099 million marks. The number of 
companies organized each year, and the total capital 
authorized was as follows : 2 



NUMBER AND CAPITAL OF JOINT-STOCK COMPANIES ORGAN- 
IZED IN GERMANY, 1886-90. 



Year. 


Number of New 
Companies. 


Capital — Million Marks. 


1886 
1887 
1888 
1889 
1890 


113 

168 
184 
360 
236 


103.94 
128.41 
193.68 
402.54 
270.99 


Total 


1061 


1099.56 



1 The Economist (London), vol. xlviii (November 29, 1890), p. 1511. 
In a statement of the Deutsche Bank issued during the first week of 
December, 1890, its commitments in Argentina appeared as follows: 
Credits extended to Argentine banks, 2,451,000 marks, of which amount 
2,000,000 marks were uncovered; investments in Argentine loans and 
syndicates, 3,395,000 marks. 

2 "The Crisis of 1890," Max Wirth, Journal of Political Economy, 
vol. i (March, 1893), p. 228. See also " The Earnings of German Com- 
panies, 1887-89," The Economist (London), vol. xlviii (December 20, 
1890), p. 1605. 



CONDITIONS IN FRANCE AND GERMANY 61 

These new companies included all branches of financial 
and industrial enterprise. Existing industries and business 
of every description were combined into joint-share cor- 
porations, and new projects were constantly being floated. 
The same reckless financial methods were also practiced 
that had marked the joint-stock company craze in Great 
Britain. The future condition of trade and industry was 
heavily discounted, and upon this basis of earning power 
the amount and value of the stock was fixed. Almost all 
of the companies were over-capitalized, and a large per- 
centage of stock was retained by promoters and vendors 
as a reward for their services. 

Despite these conditions of organization, promoters ex- 
perienced no difficulty in disposing of new issues to invest- 
ors. The gambling proclivities of the public increased 
each year after 1887. Investors were seduced by radiant 
prospectuses of new ventures, and the stock of companies 
of decidedly questionable prospects was quickly absorbed. 
The volume of credit operations was dangerously extended. 
Swindling went on unblushingly. Promoters and under- 
writers devoted all their energies to the flotation of new 
undertakings, and then sold their own holdings, leaving 
the companies in the hands of investors who knew little 
or nothing of the business which they represented. As 
a consequence large numbers of the new ventures failed, 
and it soon became evident that unless the insane specula- 
tion was checked, the country would be exposed to the 
danger of a financial collapse. 

The first note of warning came from the Reichsbank. 
This institution, however, adopted a policy entirely differ- 
ent from that of the Bank of England under similar cir- 
cumstances in Great Britain. Its discount rate, which had 
stood at five per cent, during the first two months of 1890, 
was suddenly lowered to four per cent, during the month 
of March. An opportunity was thus given to investors 
to obtain funds without throwing their holdings upon the 



62 



THE CAUSES OF THE PANIC OF 1893 



market, and in this way preventing a forced liquidation 
and a consequent collapse in values. They were not 
slow in availing themselves of the lowered rates, and the 
loans and note issues of the bank rapidly increased. 1 
During the month of March the Reichsbank increased 
its discounts and advances £7,755,000 and its note issues 
£7,376,000. 

The threatened danger of a financial panic was thus 
averted. But the effect of the action of the Reichsbank 
was only temporary. No permanent disposition had been 
made of the great mass of credit obligations and the inflated 
values which had grown out of the previous speculation. 
They still constituted a menace to the future prosperity 
of the country, and the indications were that a considerable 
period of time would be required for their liquidation. 

1 The condition of the Reichsbank during the first week of January 
of the three years 1887-89, and during the first week of January, Feb- 
ruary, March, and April, 1890, appears in the following statement: 





Assets. 


Liabilities. 
















Coin and 
Bullion. 


Discounts 

and 
Advances. 


Notes. 


Deposits. 


Discount 
Rate. 




£ 


£ 


£ 


£ 


% 


1887 Jan. 


33,815,000 


30,286,000 


48,325,000 


13,742,000 


5 


1888 " 


38,342,000 


32,404,000 


50,527,000 


16,648,000 


5 


1889 " 


43,016,000 


28,143,000 


53,745,000 


14,526,000 


*i 


1890 " 


38,251,000 


35,204,000 


50,684,000 


19,590,000 


5 


Feb. 


39,265,000 


27,176,000 


48,063,000 


14,689,000 


5 


Mar. 


41,124,000 


28,770,000 


45,204,000 


20,815,000 


4 


Apr. 


40,152,000 


36,525,000 


52,580,000 


20,006,000 


4 



CHAPTER V 

THE PANIC OF 1890 

The Financial Breakdown in Argentina. — The Resultant Liquidation in Great 
Britain. — The Baring Failure. — Measures adopted by the Bank of Eng- 
land. — Decline in Value of All Descriptions of Securities. — Forced and 
Voluntary Liquidation in Great Britain. — The Effects of Conditions in 
Great Britain upon German Money and Stock Markets. — The Financial and 
Industrial Situation in France during the Fall of 1890. — The Return to the 
United States of American Securities held in Great Britain, and the consequent 
Exports of Gold from the United States. — The Low Level of Bank Reserves 
in the United States. — Severe Stringency in the New York Money Market 
and the Issue of Clearing-House Certificates. — Decline in Stock Values. — 
Business Failures in the United States during 1890. — Continued Return of 
American Securities by Great Britain during the year 1891 and Exports of 
Gold from the United States. 

The financial situation in Germany and Great Britain 
during the early months of 1890 was, therefore, exceedingly 
precarious, owing to the reckless speculation which had 
prevailed in both of these countries, and especially in 
Great Britain during the previous four years. The action 
of the Bank of England, however, at the beginning of the 
year in raising the rate of discount, as already seen, had 
exercised a restrictive influence upon British financial 
excesses. A period of comparative ease and quiet suc- 
ceeded which lasted until about the middle of the year. 
At that time the financial troubles in Argentina reached 
an acute stage, and through their influence upon Great 
Britain brought financial affairs in that country to a critical 
stage. The dissipation of the gold reserve, which had been 
deposited with the Government by the Argentine banks 
as a guarantee of their note issues, had been followed, as 
already pointed out, by a lack of confidence in Argentine 
paper currency, and a consequent rise in the premium on 
gold, which ranged from 200 to 250 per cent, during the 
early part of the year 1890. Under these conditions great 
difficulty was experienced in carrying on the Argentine 



64 THE CAUSES OF THE PANIC OF 1893 

Government. The interest charges on cedulas, together 
with that on national, provincial, and railroad bonds held 
abroad, required the annual remittance to Europe of about 
,£7,500,000 in gold. 1 Moreover, the annual indebtedness 
of Argentina abroad was further increased by the fact that 
her merchandise imports exceeded exports. No gold was 
produced in the country, and, under the system of depre- 
ciated paper currency, none was received by the Govern- 
ment in the payment of taxes. Consequently, it soon 
became evident to public officials in Argentina that the 
only way to avoid default of payment on Government 
obligations was to negotiate fresh loans in Europe for the 
purpose of paying interest charges on previous issues. 
This recourse, however, owing to the growing suspicion 
of European investors, became more and more difficult. 
An acute crisis was therefore soon reached in Argentine 
finance. Through its influence a political revolution was 
inaugurated which in July, 1890, swept the existing 
administration out of power. 

This change of Government, as might be expected, 
weakened what little confidence there was left in Great 
Britain as to the stability of Argentine finance. British 
investors refused to place any more funds in Argentina, 
and the price of Argentine securities steadily declined. 
Consequently the English financial houses which had been 
floating Argentine loans found themselves in a position of 
great difficulty. Large masses of securities which they 
had underwritten, and which they had hoped to sell to the 
public at a profit, remained in their hands. On account of 
the fall in value of these securities it was impossible to sell 
them except at a ruinous loss. For the same reason it was 
impossible to use them as a collateral for loans. The capital 
invested was, therefore, locked up, and in order to secure 
funds to carry on their business, British financial houses 

1 "The South American Financial Crisis," The Bankers' Magazine 
(London), vol. 50 (August, 1890), p. 1254. 



THE PANIC OF 1890 65 

were forced to sell consols, American railroad stocks and 
bonds, and other good securities. These transactions 
quickly attracted attention, and rumors soon became pre- 
valent as to the embarrassment of different firms in Lon- 
don. To make matters worse, about this time there was 
a collapse in the South African gold-mining companies, 
followed by the failure of several South African banks. 
This disaster caused a further drop in stock values. At the 
same time the financial houses which had been active in 
promoting mining companies found themselves in posses- 
sion of a large mass of undigested securities, and in order to 
protect themselves were compelled to add to the existing 
alarm by throwing good securities upon the market. Under 
these conditions, the rumors as to the solvency of various 
financial houses which were known to be interested in 
Argentina and South Africa became persistent. The dis- 
trust thus generated gradually deepened until a climax 
was reached on November 15, 1890, when it was an- 
nounced that the great firm of Baring Brothers and Com- 
pany had been compelled to close its doors. 

The embarrassment of this old-established banking 
house was due to the fact that it had not taken proper care 
to keep its assets in a liquid form. It had locked up so 
much capital in South American securities, and had come 
under such serious obligations in respect to these, that it 
did not have funds to meet current liabilities. As late as 
1889 Baring Brothers had underwritten part of an Argen- 
tine loan for nearly £8,000,000 which the public had re- 
fused to absorb. 1 The immediate cause of the failure of the 
house was due to the insistence of the Argentine Government 
on its pound of flesh. The Argentine public officials had 
a lever against Messrs. Baring Brothers in the shape of a 
liability on the part of that firm to provide about £6,000,000 

1 During the period 1881-89 it was estimated that Messrs. Baring 
Brothers, together with the Spanish house of Murietta, had put out 
£42,000,000 in Argentine securities. Of this sum £20,000 000 was issued 
in 1888. 



66 THE CAUSES OF THE PANIC OF 1893 

for the Buenos Ayres Drainage and Water Works. The 
Argentine Administration proposed to compound this liabil- 
ity on the condition that Baring Brothers would negotiate 
a new loan for the purpose of meeting Argentine liabil- 
ities in Great Britain. Baring Brothers, as a prerequisite 
to the granting of the loan, demanded a sharp supervision 
over financial affairs in Argentina. 1 The Argentine officials 
resented such an interference, and pressed their claims 
against the house. 

Fortunately, at this critical juncture Baring Brothers 
and Company acted with the utmost discretion. As soon 
as they discovered that they would have to suspend pay- 
ments, they disclosed the state of their affairs to the 
directors of the Bank of England. The matter was kept 
secret, and pending an examination of the books of the 
concern, measures were taken to prevent disaster when 
the public were informed. After an investigation, the 
assets of the Barings were found to exceed their liabil- 
ities, and on the 14th day of November the chief bankers 
of London were called in to a meeting at the Bank of 
England, to take counsel over the situation. Those present, 
having received accounts of Messrs. Barings' position, 
agreed to guarantee the solvency of the firm up to £4,000,- 
000. Later in the evening boards of directors of banks 
and joint-stock companies held similar meetings. By the 
following day, when the Baring embarrassment was made 
public, the guarantee fund had risen to £15,000,000, or 
almost double the amount necessary to stave off a forced 
liquidation. 2 The affairs of the firm were placed in charge 
of the Governor of the Bank of England, and that institu- 

1 Baring Brothers demanded: (1) that the Argentine Government 
should not make any unnecessary concessions, (2) that it should not 
float any additional loans for 10 years, and (3) that no more notes should 
be issued. A further promise of a strictly economical administration was 
demanded. 

2 For the conditions under which this guarantee was extended see 
The Bankers' Magazine (London), vol. 50 (December, 1890), pp. 1933- 
1934. Also, "The Liquidation of the Barings," The Economist (Lon- 
don), vol. 47 (November 22, 1890), pp. 1465-1466. 



THE PANIC OF 1890 



67 



tion made an immediate advance of £7,000,000 to cover 
the liabilities. At the same time the Bank of England 
adopted precautionary measures relative to its gold re- 
serve. An arrangement was made with the Bank of France 
for a loan of £3,000,000 in gold on the security of Treasury 
bills, and an additional sum of .£1,500,000 of that metal 
was secured from the Russian Minister of Finance by the 
sale of Treasury bonds. 

By the adoption of these measures of precaution a gen- 
eral financial breakdown was averted. Still credit received 
a severe shock. On November 7 the Bank of England 
discount rate was advanced to 6 per cent, and remained 
at that figure until early in December. The joint-stock 
banks, on account of their apprehensions over the situa- 
tion, for a short time began to curtail their loans and dis- 
counts, and it was finally necessary for the Governor of 
the Bank of England on November 19 to caution some 
of the leading bankers that in refusing their customers the 
usual facilities for borrowing, they were taking the sure 
means of undoing all that had been done to restore con- 
fidence. The Spanish house of Murietta and Company 

NUMBER OF COMPANIES PUT INTO LIQUIDATION.! 



1890. 


1889. 


Companies. 


Compulsory 
Liquidation. 


Voluntary 
Liquidation. 


Compulsory 
Liquidation. 


Voluntary 
Liquidation. 




3 

77 
35 


17 
486 
195 


82 
49 


7 


Commercial 

Manufacturing 


431 
175 


Total England 


115 
1 
5 


698 
48 
19 


131 
1 
1 


613 
44 




15 






Total United King- 


121 


765 


133 


672 







The Economist (London), vol. xlix (January 3, 1891), p. 10. 



68 



THE CAUSES OF THE PANIC OF 1893 



had to be sustained, and other financial houses which had 
issued South American securities had to be assisted by 
friends. While the number of bankruptcies in the United 
Kingdom during the year 1890 was less than those for 
1889, there was a decided increase in the number of com- 
mercial and financial companies that went into liquida- 
tion. The statistics for the two years are shown in the 
table on the preceding page. 

This forced and voluntary liquidation, together with 
the excited condition of investors and operators, caused 
a decline in all departments of the stock market. Securi- 
ties shrank in value so greatly that much, if not all, of the 
previous inflation was swept away. Even first-class se- 

THE STOCK MARKET. STATISTICS OF PRICES 



rrices. 



End Dec. 

1890. 



End Dec. 

1889. 



Rise or Fall 
in 1890. 



New 2J % Consols (Goschen's) 

New 2$ % Consols (Goschen's) 

Colonial Inscribed Stocks — 

Canada, 3 $ % 

Cape, 4% (1883) 

Queensland, 4 % 

Home Corporation Stocks — 

Metropolitan Consolidated, 3$ % . . . 

Birmingham, 3$ % 

Home Railway Stocks — 

Caledonian 

London and Northwestern 

North-Eastern Consols 

American and Canadian Railway 
Shares — 

Central Pacific shares 

Illinois Central shares 

New York Central shares 

Pennsylvania R. R. $50 shares 

South American, etc., stocks — 

Argentine, 5 %, 1886 

Buenos Ayres, 6 %, 1882-86 

Guatemala, 4 % 

Uruguay, 5 % Unified 



95| 
92$ 

103 
108 
107 

109| 
107$ 

119 

177$ 
165| 



30 
100 
103 

5H 

77$ 
68$ 
47 
51$ 



97* 
94J 

105 

110* 

111$ 

112| 
llOf 

129 
181| 

1755 



35| 
122 

1111 
54| 

94 
99 
62 

73J 



If 

21 



3 

10 

■ 41 
■10J 



- 51 
-22 

- 81 

- 3$ 

-16$ 
-30$ 
-15 
-21f 



THE PANIC OF 1890 69 

curities were seriously affected in the downward rush of 
the market. 1 The inflated South American and other 
speculative issues, however, came in for the largest amount 
of depreciation. This fact appears from a comparison of 
the quotations of some of the leading stocks on Decem- 
ber 31, 1889, with the quotations of the year previous. 2 
(See table on p. 68.) 

The fall in the prices of good securities was principally 
due to the efforts of investors and financial houses to pro- 
tect their speculative holdings. The process of selling 
first-class securities in order to prevent the sacrifice of 
speculative shares, as already seen, had been going on 
steadily during the first three-quarters of the year. After 
the failure of the Barings and the consequent liquidation 
and the collapse of inflated values, underwriters and 
financial institutions found it more and more difficult to 
carry the large mass of securities which they had been un- 
able to foist upon the public. As calls upon them fell due, 
and as fresh margins, owing to the decline in prices, had 
to be supplied, it became necessary to throw on the market 
a constantly increasing amount of salable securities such 
as consols and the shares of first-class home corporations. 
Considerable funds were also realized from the sale of 
the stocks and bonds of railroads in the United States. 
The continued offering for sale of securities of this char- 
acter, at a time when there was an unusually active 
demand for money, not only resulted, as might be ex- 
pected, in a decline in their value, but also contributed to 
the general depression of prices in the stock market. 

This downward tendency of stock values was strongly 
reflected in the German market. The amount of German 
capital commitments in Argentina, as already seen, had 
been steadily decreasing since the year 1888, and in 1890 

i "Why Prices have collapsed on the Stock Exchange," The Econo- 
mist (London), vol. xlviii (November 22, 1890), pp. 1471-72. 

2 " Commercial History and Review of 1890," p. 35, Annual Supple- 
ment of The Economist (London), vol. xlix (February 21, 1891). 



70 THE CAUSES OF THE PANIC OF 1893 

the principal holders of Argentine securities were small 
investors who were scattered throughout the country, and 
for this reason could not through the sale of their holdings 
exert a dangerous pressure upon the stock market. Con- 
sequently German financial houses were not directly 
threatened by the turn of affairs in Argentina. The Ger- 
man stock and money markets, however, were indirectly 
affected by the embarrassment and liquidation in Great 
Britain following the failure of Baring Brothers. In 
October, 1890, the discount rate of the Reichsbank was 
raised from 4 to 5 per cent. In November it advanced to 
5| per cent, and remained at that point during the rest 
of the year. During these months also the market rate 
was almost equal to the bank rate. But the action of the 
Reichsbank in lowering its rate of discount in March, 
1890, as already pointed out, had been followed by a restric- 
tion of speculation and a fall in stock values. The market 
value of the total shares of industrial companies traded 
in at Berlin from January to November, 1890, declined 
over 21 per cent. During the same period there was a fall 
of more than 10 per cent, in the value of bank shares. 
After November, 1890, conditions in Great Britain gave 
a further impetus to the downward movement, and a sharp 
decline was experienced in all descriptions of securities. 
Beyond this depression in the stock market, however, no 
adverse results followed. The influence of affairs in Great 
Britain during the autumn of 1890 only served to increase 
the dragging liquidation and depression which had been 
apparent in Germany from the beginning of the year. 

On the other hand, the situation in Great Britain had no 
permanently injurious effect upon conditions in France. 
The caution of French investors, together with the losses 
of the country in the copper speculation and the Panama 
Canal Company, had saved France, as already pointed out, 
from the financial excesses for which Germany and Great 
Britain were being punished. The gold reserves of the 



THE PANIC OF 1890 71 

Bank of France were ample, and in addition to the assist- 
ance rendered to the Bank of England by the loan of 
£3,000,000 of gold, £2,000,000 of that metal was sold to 
the Credit Lyonnais to strengthen its London branch. 
For a time prices on the Bourse moved downward in 
sympathy with the British market. This tendency was 
especially noticeable in the case of Argentine national 
and provincial bonds, and in the shares of French banks 
which were supposed to have assisted in the flotation of 
Argentine securities. Within a few weeks, however, 
there was a full recovery, and French bank and industrial 
shares showed a substantial increase in value for the 
year. 1 As a matter of fact, French investors profited by 
the depressed stock values in Germany and Great Britain 
by making heavy purchases of securities in London and 
Berlin. From an industrial and commercial point of view 
the year 1890 was also satisfactory to France. Foreign 
trade in both imports and exports was increased, and 
receipts from railroad traffic showed widespread activity 
in trade and industry. 2 All the visible elements of national 
prosperity, in brief, gave evidence of a decided improve- 
ment. 

The collapse in Argentine speculation had thus brought 
about a financial breakdown and forced liquidation in 
Great Britain, and had added indirectly to the depression 
of stock values and the dragging liquidation which was 
already in progress in Germany. On the other hand, 
France, because of her previous freedom from speculation, 
had not suffered any considerable losses. It now remains 
to be seen what effect this condition of affairs in Great 
Britain and Germany had upon the financial situation in 
the United States. 

As a matter of fact, the financial breakdown in Great 
Britain was of very serious significance to this country. 

1 The Economist (London), vol. xlix (January 3, 1891), p. 11. 
\ Ibid. vol. xlviii (December 2, 1890), p. 1541. 



72 THE CAUSES OF THE PANIC OF 1893 

In a previous chapter 1 it was shown that during the period 
1886-90 the United States had purchased enormous 
quantities of merchandise in the United Kingdom. Pay- 
ments for this merchandise had been made in American 
securities, chiefly in the form of American negotiable 
railroad stocks and bonds. Our abnormal excess of mer- 
chandise imports during the years preceding 1890 repre- 
sented, therefore, capital largely invested by Great Britain 
in American railroads. 

As a result of the liquidation in Great Britain during 
the year 1890, this capital, as might be expected, was re- 
called. Underwriters and investors in Great Britain, as 
already seen, owing to the growing distrust of Argentine 
issues during the first three quarters of 1890, were forced 
to sell first-class securities in order to realize funds to pre- 
vent the sacrifice of their speculative holdings. A con- 
siderable percentage of the securities which were thus 
offered for sale were the negotiable American railroad 
securities which had been absorbed by Great Britain 
during the period 1886-90. These were at once returned 
to the United States. During the forced and volun- 
tary liquidation which followed the suspension of Bar- 
ing Brothers, a constantly increasing volume of Ameri- 
can securities were sent back to this country by Great 
Britain to be sold. British capital commitments in the 
United States also ceased. As a result of this action by 
Great Britain, gold flowed out of the United States. The 
net exports of that metal from this country during the 
two months prior to August 10 amounted to $16,000,000. 

This outflow of gold occurred at a time when the banks 
of the United States were not in a position to stand the loss. 
The industrial activity in the West and South during the 
early half of the year 1890 had been attended with heavy 
demands for funds. At the same time, the bank reserves 
of the New York City banks, which had almost reached 
the minimum limit of 25 per cent, of deposits at the close 
1 Chapter I. 



THE PANIC OF 1890 



73 



of 1889, still continued at this low level during the first 
half of the year 1890. On the 16th of August the bank 
surplus in New York fell below the legal requirement. 
From that time a deficit was shown in the weekly bank 
statements of the New York banks for eleven weeks out of 
the twenty remaining to the end of the year. The largest 
deficit was on September 13, when it reached $3,306,900.* 
Under these conditions, the heavy and continuous de- 
mand for money in the interior of the country, together 
with the withdrawal of gold for export, soon brought about 
serious trouble in the American money market, which later 
developed into a severe stringency. As early as August 8 
rates on call loans advanced to 20 and 25 per cent. 2 Two 
weeks later J per cent, commission a day was paid in 
addition to 6 per cent, per annum, or an equivalent of 
186 per cent, a year. For two weeks during the middle of 

1 The amount of the surplus and the ratio of reserves to deposits of the 
New York Clearing-House banks appears in the following statement : 

NEW YORK CLEARING-HOUSE BANKS STATEMENT (000 's omitted) 





Surplus Reserve. 


Reserve to 
Deposits. 


August 


2 


deficit 
deficit 
deficit 
deficit 
deficit 

deficit 
deficit 

deficit 
deficit 
deficit 

deficit 


$ 
8,959 
1,286 

655 
2,512 

536 
1,401 
3,306 
1,905 
14,075 
11,511 
3,155 

349 

124 

701 
2,544 

832 
89 

382 
2,429 

607 
4,498 
7,725 


Per cent. 
27.1 


9 

16 


25.3 
24.8 




23 


24.3 




30 


24.8 




6 


24.6 




13 


24.1 




20 


25.4 




27 


28.4 




4 


27.7 




11 


25.7 




18 


24. 




25 


24.9 


November 


1 


25.1 




8 


24.3 




15 


24.7 




22 


24.1 




29 


25.1 




6 


24.3 




13 


25.1 




20 


26.1 




27 


27. 









2 The quotations for prime commercial paper in the New York money 



74 



THE CAUSES OF THE PANIC OF 1893 



September, and for a similar period after news of the 
Baring failure in England, the same extraordinary rates 
were demanded. Finally, the New York banks resolved 
to relieve the existing stringency by the emergency oper- 
ation of issuing Clearing-House certificates. The first 
certificates were authorized by the New York Clearing- 
House Association on the 11th of November. After that 
date further issues were made in accordance with the 
demand. The maximum amount outstanding at one time 
was on December 13, when there were $15,205,000. By 
the end of the year this amount had been reduced to 
$12,995,000. Clearing-House certificates were also author- 
ized in Boston on November 17, and in Philadelphia on 
November 18. The maximum issue in the former city 
was $5,065,000, and in the latter $8,870,000. x 

This extraordinary stringency in the money market was 
attended by commercial and financial disaster. The agita- 
tion of the silver question in Congress during the early 
part of 1890 had been followed by speculation in silver 
bullion and silver stocks. This movement soon spread to 
other departments of the stock market, and finally attained 
the proportion of a general boom in stock values which 



market from August to December, 1890, as reported by The Commercial 
and Financial Chronicle, ranged from G to i) j>cr cent. Quotations for 
call loans during the same period were as follows: 



Week 




Week 






ending 


Call Loans. 


ending 




Call Loans. 


Friday. 




Friday. 






Aug. 1 


2 and 6 


Oct. 17 


2J and 6 


8 


3 20 


24 


3 


8 


15 


3 25 


31 


3 


30 


22 


3 6+ i per day. 


Nov. 7 


s 


25 


29 


2 15 


14 


2i 


6+ £ per day. 


Sept. 5 


3 12 


21 


2 


6+ i per day. 


12 


3 6+ i per day. 


28 


2 


8 + i Per day. 


19 


2 6+ i per day. 


Dec. 6 


3 


15 


26 


2 6 


12 


2 


6+ £ per day. 


Oct. 3 


2 6 


19 


2 


6 


10 


2J 7 


26 


3 


6 



1 Report of the Comptroller of the Currency, Treasury Report, 1891, 
pp. 327-30. 



THE PANIC OF 1890 



75 



reached its highest point during the month of May. 1 
During succeeding months stock values declined and the 
heavy selling of securities in Great Britain, followed by 
the stringency in the American money market, was quickly 
reflected in a downward movement of stock values in the 
United States. The range in price during the year 1890 
of the leading stocks on the New York market appears 
in the following table : 

PRICES OF LEADING STOCKS IN 1890. 
(Fractional part of quotations omitted.) 



Opening 
(Jan. 1). 



Highest. 



Closing 
(Dec.31). 



Railroads : 

Baltimore and Ohio 

N. Y. Central and Hudson 

Delaware and Hudson 

Atchison, Topeka and Santa Fe 

Illinois Central 

Northern Pacific 

Norfolk and Western 

Miscellaneous: 

American Cotton Oil Trust ... 

Pipe Line Certificates 

Sugar Trust 

Western Union Tel 



101 

100 

147 

33 

117 

30 

22 

30 

102 

58 

83 



107 (May 23) 
111 (June 3) 
175 (May 14) 

50 (May 15) 

120 (Jan. 31) 

39 (June 10) 

24 (May 6) 

34 (May 19) 

108 (Jan. 21) 
95 (May 21) 
87 (May 14) 



92 
101 
132 
28 
97 
21 
14 

16 
70 
57 
76 



As a result of this depression in stock values, stock 
operators and speculators, who had loaded up with large 
masses of securities in anticipation of a silver inflation, 
lost immense sums. Many brokers and investors, together 
with a number of financial houses, owing to the stringency 
of the money market, were unable to secure funds to pro- 
tect their holdings, or, on the other hand, they found it 
necessary to dispose of first-class securities at a loss, and, 
as a consequence, were forced to suspend payments. 
Moreover, many importers and dealers, as well as manu- 

1 During the month of May, 1890, 11,052,779 shares of stock of a 
par value of $1,051,139,065 and an actual value of $628,978,858, were 
sold on the New York Stock Exchange; during May, 1889. 7,155,711 
shares of a par value of $673,794,760 and an actual value of $420,969, 966 
were sold. 



76 



THE CAUSES OF THE PANIC OF 1893 



facturers, had extended their credit as far as possible in 
laying in stocks of commodities in anticipation of a rise 
of prices alter the enactment of the McKinley Tariff Bill. 
In many cases the financial stringency prevented them 
from securing funds to meet their obligations, and they 
also were driven into bankruptcy. Finally, the high rales 
for loans in the money market almost amounted at certain 
periods to a suspension of credit, and were responsible for 
the failure of a great many mercantile houses and indus- 
trial establishments which were dependent upon unin- 
terrupted accommodations, and which, under normal con- 
ditions, would have had small difficulty in continuing their 
operations. The number of mercantile failures reported 
during the year was 10,907, with liabilities of $189,856,964. 
During the year 1SS9 the number of failures was 10,882, 
representing liabilities of $148,784,im. 1 

The greater number of failures in 1890, however, did not 
represent any serious unsoundness in financial and com- 
mercial circles. Interior trade was active. Bank clearings 
and railroad earnings were also larger than in the pre- 
ceding year. Our foreign hade showed a large increase. 
The production of iron and steel was greater than the 
output during the year 1889. 2 Moreover, the business 
failures themselves during the year 1890, in the light of 
the stringency in the money market, clearly indicated that 

1 The Commercial and Financial Chronicle, Annual Supplement, 
Financial Review of 1890, p. 15. 

2 The following summary furnishes at a glance a brief industrial com- 
parison of the two years 1889 and 1S!)0 : 



Hank clearings in the U. S 

Imports of merchandise 

Exports of merchandise 

Gross earnings of railroads 

Pig-iron produced (tons of 2000 lbs.) 

Steel rails produced (tons of 2240 

lbs.) 



1889. 



$56,175,827,997 

770,531,965 

827,106,847 

991,935,831 

8,516,079 

1,403,700 



1S!)0. 



$00,117,801,303 

828,818,782 

857,623,677 

1,086,039,735 

10,307,028 

1,522,204 



THE PANIC OF 1890 



77 



industry and business were in a safer position, and con- 
ducted on a wider margin, than during the preceding year. 
This fact becomes apparent from a comparison of the 
failures of the first three-quarters of each year during the 
two years 1888-90. 



First Nino Months of 



1890 
1889 



Number of 
Failures. 



7581 

7879 



Amount of 
Liabilities. 



$100,771,820 
105,055,898 



From these figures it is evident that the proportion of 
casualties during the first three-quarters of 1890 was less, 
although the strain was greater than during the previous 
year. The latter quarter of 1890 was, of course, marked 
by exceptional conditions, and the number of failures 
as compared with previous years was greatly increased. 
It was due to the solid position of our industries, however, 
that the financial breakdown in the latter part of the year 
was not more widespread and disastrous. At the same 
time, the fact that the industrial and business collapse had 
not been more extended furnished hope that the country 
would not be long in recovering from the effect of the 
panic. 

Great Britain and Germany, however, continued their 
process of liquidation, and the effect was keenly felt in the 
United States. Temporary respite from the stringent 
condition of the money market was obtained during the 
early part of December, 1890, by the importation of 
$5,000,000 in gold from abroad. During the first half of the 
year 189 1 the money market was also much easier, and 
there was never any recurrence of the extraordinary rates 
for call loans which had prevailed during the preceding 
six months. American securities, however, continued to 
be returned by Great Britain. Although Great Britain 



78 THE CAUSES OF THE PANIC OF 1893 

and Germany were recovering from the effects of the 
Baring panic, confidence in foreign investments had not 
returned. Consequently there was no demand from 
abroad for American securities, but on the contrary a 
constant effort to get rid of them. Imports of merchandise 
into the United States were also heavy during the first 
half of 1891, owing to the fact that some of the schedules of 
the McKinley Law, such as the duties on tinplate, did not 
go into effect until the middle of the year. Because of the 
small crops of 1890 and the lessened European demand, 
the exports of agricultural products from the United 
States were not sufficient to offset these two tendencies in 
the international trade situation. The result was an out- 
flow of gold from the United States which lasted from 
February to late in the month of July, 1891. x There was 
also depression in business and industry, and the decline 
in stock values continued until a very low level was reached. 
During the first half of 1891 there were, in short, no indi- 
cations of relief in the United States from the indirect 
but evil effects which had grown out of the Argentine 
collapse and the Baring failure. 

1 The net total of gold exported during these months was $72,786,666. 



CHAPTER VI 

RECOVERY FROM THE PANIC OF 1890 AND FINANCIAL 
CONDITIONS IN THE UNITED STATES, 1891-93 

The Extiaordinary Grain Crop of 1891 in the United States. — Heavy Exports 
of Grain from the United States in the Face of a European Harvest Shortage. 

— Imports of Gold and Recovery from the Previous Financial Depression. 

— Appropriations of the Fifty- First Congress. — Increase in Circulation of 
the Country through Government Extravagance and Issue of Treasury 
Notes. — Increase in Legal-Tender Holdings of New York Banks. — Legal- 
Tender Notes used in the Payment of New York Clearing-House Balances. — 
Increased Percentage of Legal-Tender Notes used in the Payment of Customs 
Duties. — The Payment of Government Balances at the New York Clearing- 
House in Greenbacks and Treasury Notes. — Withdrawal of Foreign Capital 
and Exports of Gold from the Country. — Presentment of Greenbacks and 
Treasury Notes at the Treasury for Redemption. — Decline of the Treasury 
Gold Reserve below the Statutory Minimum, and the General Distrust over 
the Currency Situation. 

After the first of August, 1891, a fortunate turn in the 
international grain situation brought about a radical 
change in the depressed conditions which had prevailed 
in the United States during the preceding nine months. 
The wheat crop of 1891 in the United States was the larg- 
est up to that time which had ever been grown. The re- 
turns showed a yield of 611,780,000 bushels in 1891 against 
399,262,000 bushels in 1890. The same remarkable in- 
crease was also true of the corn and oats crop. Moreover, 
the cotton crop in 1891 was unprecedented. 1 The most 
significant feature in the situation, however, lay in the 
fact that this extraordinary increase in the production of 
cotton and cereals in the United States was coincident with 
a shortage in European harvests. The Russian wheat 

1 The yield of corn in the United States in 1891 was 2,069,154,000 
bushels against 1,489,970,000 bushels in 1890: the vield of oats in 1891 
was 738,394,000 bushels against 523,621,000 bushels'in 1890. The cotton 
crop in 1891 was 9,038,707 bales against 8,655,618 bales in 1890, and 
7,313,726 bales in 1889. 



80 THE CAUSES OF THE PANIC OF 1893 

crop, which, next to that of the United States, was most 
largely depended upon by European consumers, was al- 
most a total failure. The grain shortage in France was one 
of the most serious in the history of the country. The 
Russian Government issued a ukase against the export of 
rye on August 10, and another against the export of wheat 
on November 21. A decree removing the import duty on 
wheat was also promulgated in France. The market for 
American grain was therefore broad and eager. On ac- 
count of the small crops of the two years 1889 and 1890 the 
European demand for American cereals quickly developed 
and the pressure of export grain from the United States 
during the autumn of 1891 was very great. The export 
of breadstuffs almost equaled the enormous outward 
trade during the year 1879-80 following the resumption 
of specie payments. 1 

Under these conditions, a radical change in the inter- 
national trade situation quickly developed. Exports of 
gold ceased in July. Although imports of merchandise 
into the United States increased, the trade balance during 
August turned sharply in favor of this country. From that 
time until the end of the year the net importation of gold 
amounted to about $37,500,000. 2 With this influx of gold 
into the country, the bank reserves became ample and 
the money market easy. As a matter of fact, the absence 
of the usual stringency in the New York money market 
during the closing months of the year was quite notable, 
call loans ranging in December from 2 to 4 per cent. 
Improvement in the prices of stocks and bonds also began 
early in August, and except for a downward turn in the 
months of October and November, there was a steady 
gain in values. Quotations stood at a much higher point 
at the closing of the year than at the opening. Great 

1 Statistical Abstract of the United States, 1903, p. 337, Department 
of Commerce and Labor, Washington. 

2 Report of the Secretary of the Treasury, 1892, p. 258. 



CONDITIONS IN UNITED STATES — 1891-93 81 

Britain, owing to the disclosures which had followed the 
Baring liquidation, had not recovered full confidence in 
foreign securities, and the new capital commitments in 
London were small in comparison with previous years. 
At the same time, conditions were so improved in the 
United Kingdom that it was no longer necessary to recall 
British capital invested in America. 1 On the contrary, 
Great Britain was a purchaser of American securities 
during August and September, 1891, and during the 
month of December there was a marked advance in 
American railroad issues on the London Stock Exchange, 2 
While the heavy exports of grain did not affect very 
sharply the interior trade situation in the United States, 
beyond adding to the transportation business, the pros- 
pects of increased activity and better prices were very 
bright. The iron and steel trade also showed signs of 
expansion as early as August, and in the latter part of 
the year more furnaces went into blast and the demand 
for iron and steel products constantly grew larger. 3 On 
all sides there were indications of a revival, and of a com- 
plete recovery from the previous financial depression. 
The extraordinary American grain crop, in brief, in the 
face of an extensive European demand, furnished an 
unprecedented basis for a healthy industrial and trade 
expansion, and, if the finances of the United States had 
been in a sound condition, the country would have probably 
entered upon a period of unsurpassed prosperity. As it 
was, however, the natural economic development of the 
country at this time was checked, and finally subverted, 
by the evil effects of the previous silver legislation and the 
general fiscal policy of the Harrison Administration. 
It was pointed out in a previous chapter that the Har- 

1 "Commercial History and Review of 1891," Annual Supplement to 
The Economist (London), vol. 50. 

2 The Economist (London), vol. 49 (December 26, 1891), p. 1651. 

3 "The Financial Review of 1891," Annual Supplement to The Com- 
mercial and Financial Chronicle, p. 1. 



82 THE CAUSES OF THE PANIC OF 1893 

rison Administration, when it assumed control of the Gov- 
ernment, in 1889, adopted a twofold policy for the purpose 
of getting rid of the surplus revenue which during the years 
preceding 1890 had been a marked feature of the fiscal 
situation. 1 On the one hand, the McKinley Bill was so 
framed as to eliminate some of the most productive 
sources of public revenue, such as the receipts from duties 
on sugar. 2 On the other hand, Congress was encouraged 
to enter upon a course of increased expenditures. The 
Fiftieth Congress, as already seen, was not slow in putting 
the latter part of this policy into operation, and had 
greatly increased the annual appropriations of the Gov- 
ernment. But its successor, the Fifty-First Congress, 
which held its sessions during the two years 1891 and 
1892, went even further in the way of Government extrava- 
gance. During its first session it raised the annual outlay 
for pensions over $16,000,000, and during its second ses- 
sion added a further increase of more than $46,000,000. 
It ran up appropriations for rivers and harbors almost 
$6,000,000. It also authorized about $3,000,000 additional 
for forts and fortifications. Similar increases were made 
in the provisions for the various permanent departments 
of the Government. Every committee seemed to make its 
calculations with the idea that there was an unlimited 
fund upon which to draw. The total budget for the year 
1891 was more than 69 million dollars larger than that for 
1890; and the total outlay for 1892 was 36 million dollars 
greater than that for 1891. The combined appropriations 
of the Fifty-First exceeded those of its predecessors by 
more than 148 millions. 3 

This extravagant policy soon had the desired result. 
Under its operation the surplus revenue was not only 

1 See p. 14. 

2 It provided also for the payment of a bounty to producers of 
domestic sugar. 

s An itemized statement of the appropriations of Congress during the 
period 1890-93 is to be had in the Report of the Secretary of the Treas- 
ury, 1893, p. cxvi. 



CONDITIONS IN UNITED STATES— 1891-93 83 

wiped out, but the Treasury was even threatened with a 
deficit. As early as April, 1891, the Treasury was forced 
to suspend the redemption of the public debt, except such 
an amount as was necessary to meet the sinking fund 
requirement. 1 Moreover, all the demands upon the Treas- 
ury which were not compulsory were refused. Despite 
these and similar expedients, however, there was a Treas- 
ury deficit of more than $1,000,000 during the fourth 
quarter of the fiscal year 189 1. 2 Larger deficits occurred 
during the second and fourth quarters of 1892. 3 Fortu- 
nately, in each of these cases an expansion of revenues 
during the other periods of the year prevented an annual 
deficit in Government receipts as compared with expend- 
itures. 

But not only the extravagance of Congress caused a 
serious diminution in Government resources. The in- 
creased disbursements of the Government, by dissipating 
the surplus revenue which would have otherwise accu- 
mulated in the Treasury, also added largely to the amount 
of money in circulation. At the same time a steady stream 
of Treasury notes, through the operation of the Sherman 
Act of 1890, was being poured into the circulation of the 
country. This law, as already seen, authorized the pur- 
chase of 4,500,000 ounces of silver each month, to be 
paid for in legal-tender Treasury notes, and was practically 
equivalent to guaranteeing an increase in the circulating 
medium of something like $50,000,000 annually. 4 Alto- 
gether, as a result of the silver issues of the Treasury, and 
of the increased expenditures of the Government, the money 
in circulation in the United States during the eighteen 
months ending December 31, 1891, had been increased to 
the extent of $172,276,526. Within the last six months 

1 Report of the Secretary of the Treasury, 1891, p. xxvi. 

2 Ibid., p. 233. 3 Ibid., 1892, p. 39. 

4 At the end of the fiscal year 1891 there were outstanding $59,228,417 
of Treasury notes of 1899. At the end of the fiscal year 1892 this 
amount had been increased to $199,863,239. — Report of the Secretary 
of the Treasury, 1892, p. 61. 



84 THE CAUSES OF THE PANIC OF 1893 

of this period, — between July 1, 1891, and January 1, 
1892, — the circulating medium of the country under- 
went an expansion of $104,207,636. 1 

If the forms of money which were thus used to increase 
the circulation had been of a sound character, or if the 
state of business and trade — the increase of small cash 
transactions — had been such as to demand more money, 
there would have been no serious significance attached 
to this extraordinary expansion of the circulating medium 
of the country. As it was, however, the difficulty pre- 
viously experienced by the Treasury officials, even dur- 
ing the exceptionally prosperous period 1886-90, in main- 
taining in circulation the silver certificates authorized by 
the Act of 1878, pointed to the fact that any arbitrary 
increase in the currency, such as the automatic issue of 
$50,000,000 of Treasury notes each year, would be at- 
tended with much hazard. 

Unfortunately for the country, this inherent danger in 
the operation of the Sherman Law soon made itself evident. 
The business activity which attended the harvesting and 
marketing of the enormous grain crop of 1891 absorbed 
for a time the increased circulating medium of the country. 
Owing to the urgent demand of the European market, 
however, the movement of the season's crop and the ex- 
port of grain was over at an earlier date than usual. With 
the European buyers of grain thus satisfied, the harvest 
trade contracted, and the Western banks at once found 
their vaults full of idle currency. In November, 1891, 
this currency began to move East in great quantities. The 
supply of currency in New York immediately showed an 
increase. The tendency of most serious import in con- 
nection with the movement soon became apparent in the 
rapid growth in the legal-tender holdings of the New York 
banks. Prior to the passage of the Silver Law of 1890 their 
legal-tender holdings had never exceeded the demands 
1 Report of the Secretary of the Treasury, 1892, p. 103. 



CONDITIONS IN UNITED STATES — 1891-93 85 

of their customers. Beginning with the autumn of 1891, 
however, each succeeding harvest season was followed by 
the movement of an increased amount of greenbacks and 
Treasury notes of 1890 from the interior to the East. This 
tendency is apparent from the following table showing the 
legal-tender holdings of the New York Clearing-House 
banks from November, 1891, to June, 1893 : x 

LEGAL-TENDER HOLDINGS OF NEW YORK CLEARING-HOUSE 
BANKS, 1891-93 (000's omitted) 



First Week of 






November, 


1890, 


$22,101 


December, 


1890, 


23,963 


January, 


1891, 


26,571 


June, 


1891, 


6,687 


January, 


1892, 


37,814 


June, 


1892, 


55,159 


August, 


1892, 


60,278 


January, 


1893, 


46,157 


June, 


1893, 


58,683 



This accumulation of greenbacks and Treasury notes 
of 1890 in the New York banks would ordinarily have had 
no significance beyond the fact that the currency of the 
country was greatly in excess of the needs of trade. Under 
the operation of the silver legislation of 1890, however, the 
situation was one of serious import. Bankers soon realized 
that under the Sherman Law of 1890 there was no limit to 
this increase in their legal-tender holdings. On the con- 
trary, the limit of their gold reserves might be reached in 
a single season. To protect their depositors, therefore, 
they sought to retain their gold reserves and to get rid of 
as large an amount of their legal-tender holdings as pos- 
sible. The Treasury notes of 1890, as already seen, were 
redeemable in gold and were available for all banking 
purposes. Consequently they could not be excluded from 
settlements at the New York Clearing-House, as had hap- 
pened in the case of the silver certificates authorized by 

1 Compiled from Clearing-House Statements published in The Com- 
mercial and Financial Chronicle. 



86 THE CAUSES OF THE PANIC OF 1893 

the Act of 1878. The result was an increasing use of Treas- 
ury notes and greenbacks in settlements between the 
banks. In 1890 the legal-tender notes had been used in 
the payment of only one per cent, of New York Clearing- 
House balances. In 1891 thirty-five per cent, of the bal- 
ances were paid in legal tenders. During the year 1892 
the percentage of legal-tender payments had risen to fifty- 
seven and a half. 

The next step taken by the banks to reduce their sup- 
plies of legal tenders was one which, as already pointed 
out, was taken during the two years 1884 and 1885, 
when the silver circulation under the Act of 1878 became 
redundant. It consisted in working off on the Treasury 
silver issues and greenbacks by way of the customs 
revenue. During the first six months of 1890 about 
ninety per cent, of the customs revenue at New York 
was received in gold. During the subsequent two years 
the percentage of payments in gold steadily decreased. 
In June, 1891, gold coin and certificates formed only 
about twelve per cent, of the total receipts ; in June, 
1892, they were eight per cent.; in December, 1892, four 
per cent.; and by the end of April, 1893, gold payments 
practically ceased. Gold was thus gradually displaced in 
the Government customs receipts by silver certificates, 
Treasury notes of 1890, and greenbacks. As early as 
June, 1891, forty-four per cent, of the customs duties at 
New York were paid in greenbacks and twenty-nine per 
cent, in Treasury notes. In June, 1892, forty-nine per 
cent, of the customs revenues were received in Treasury 
notes and twenty-six per cent, in greenbacks. During the 
year 1892, as a whole, and the first quarter of 1893, about 
seventy-five per cent, of the customs revenues came in the 
shape of greenbacks and Treasury notes. From June, 
1892, a constantly increasing percentage of payments was 
also made with silver certificates. 1 The percentage of the 
1 Report of the Secretary of the Treasury, 1893, p. 36. 



CONDITIONS IN UNITED STATES — 1891-93 87 

various kinds of money used for customs payments at 
New York is graphically exhibited in the following 
chart : 1 



KINDS OF MONET RECEIVED IN MONTHLY PAYMENTS 

FOR CUSTOMS AT NEW YORK. BY PERCENTAGES 




^Treasury Notes and 
JUnitedStateB Notes. 
| Gold Coin and 
(Gold Certificates. 



[Silver Coin and 
Siiver-Certincates. 



The tendency of this flow of greenbacks, Treasury 
notes, and silver certificates into the customs revenue was 
to place the Treasury in the same embarrassing position 
it had occupied during the two years 1884 and 1885, when 
its receipts of gold were displaced by silver certificates, and 
the maintenance of its gold reserve was endangered by 
disbursements of gold to meet Government obligations. 
But the Treasury notes of 1890, as already seen, were 
entirely different from the silver certificates in that they 

1 This chart is a partial reproduction of Chart I of the Report of the 
Indianapolis Monetary Commission. 



88 THE CAUSES OF THE PANIC OF 1893 

were available for the payment of Clearing-House bal- 
ances. Secretary Foster, therefore, when confronted with 
a rapid shrinkage of gold receipts and the consequent 
possibility of a fall in the Treasury gold reserve to the 
danger-point, decided that the Government's own dis- 
bursements should be stopped. Accordingly, during the 
fiscal years 1891 and 1892 a constantly decreasing amount 
of gold was paid into the New York Clearing-House in 
settlement of balances against the New York Subtreasury. 
After December, 1892, gold payments to the New York 
Clearing-House were practically abandoned. On the other 
hand, during the fiscal year 1891, $31,957,946 in Treas- 
ury notes were used in the payment of Clearing-House 
balances. In the fiscal year 1892 the amount of Treasury 
notes used for this purpose was increased to $57,826,734. 
A large volume of greenbacks during these two years was 
also sent to the Clearing-House by the Government. From 
June, 1892, to July, 1893, the settlement of Government 
balances was almost exclusively effected in these two 
forms of currency. 1 

Gold was, therefore, hoarded both by the Government 
and by the banks. At the same time, as already pointed 
out, fresh supplies of gold for the Treasury were cut off 
through the displacement of gold in the customs receipts 
by Treasury notes, greenbacks, and silver certificates. 
As a consequence, the net amount of gold in the Treasury 
steadily declined (see Chart II, p. 93), and apprehension 
began to be felt as to the ability of the Treasury to con- 
tinue gold payments unless the existing drain upon its 
reserves was stopped. This apprehension soon affected 
foreigners who had funds invested in the United States. 
The embarrassment in Great Britain following the Baring 
disaster had disappeared by the autumn of 1891, as al- 
ready seen, and the process of sending securities to the 
United States to relieve Great Britain's financial neces- 

1 Report of the Secretary of the Treasury (Finance), 1893, p. 40. 



CONDITIONS IN UNITED STATES — 1891-93 89 

sities had long since ceased. But the currency situation 
in the United States had been viewed with alarm by Brit- 
ish investors as early as 1891. 1 The continued agitation 
of the silver question in Congress and the constant fear 
that a free-coinage silver law would be passed, together 
with the attitude of the United States in the Brussels 
Monetary Conference of 1892, did not serve to lessen 
but rather to increase their apprehensions. In its issue 
of February 20, 1892, the "London Economist," in dis- 
cussing Richard P. Bland's report on a free-coinage meas- 
ure, made the following comment on the condition of the 
currency in the United States : 2 

"The constant agitation on the question [free coinage of sil- 
ver], however, is proving injurious to the States. It frightens 
away capital, checks enterprise, and paralyses industry. And 
now that the Silver party have openly adopted the repudiation 
of gold contracts as the chief plank in their platform, its deaden- 
ing and depressing influence may be expected to become still 
more pronounced." 

Four months later "The Economist" gave expression 
to the increasing apprehension in Great Britain relative 
to the currency situation in this country. In its issue of 
July 9, 1892, it said: 3 

"It is very evident that if the Treasury continues to lose gold, 
and at the same time piles up liabilities payable in gold on de- 
mand, as it has been doing since the Act of 1890 was passed, it 
is likely before very long to become involved in serious difficul- 
ties. Its reserve is approaching the 'apprehension point,' the 
point, that is, at which people will begin to fear that its stock of 
gold will not be sufficient to meet the demands that may be made 
upon it, and will be disposed to make a rush to convert their 
notes, lest, if they delay, conversion will be impossible. Already 

1 " United States Currency and Finance," The Economist (London), 
vol. 49 (December 26, 1891), p. 1648. 

2 " The Report of the United States Coinage Committee," The Econo- 
mist (London), vol. 50 (February 20, 1892), p. 244. 

3 "United States Currency and Finance," The Economist (London), 
vol. 50, p. 887. 



90 



THE CAUSES OF THE PANIC OF 1893 



there is a good deal of nervousness, as is shown by the sensitive- 
ness of the American stock markets to the continued efflux of 
gold to this side. . . . The States thus appear to be drifting 
into grave monetary trouble." 

Consequently, (when gold was hoarded by the United 
States Government and the New York banks, and when 
the tendency toward an embarrassment of the Treasury 
became more and more pronounced, British and other 
foreign investors in American securities hastened to get 
rid of their holdings before a very general distrust and 
large sales would cause a fall in prices. The excess of 
merchandise exports from the United States over imports 
during the fiscal year 1892 was $202,000,000 in round 
numbers, and yet no gold was sent back in payment. 
Payments were made by the return of American securi- 
ties. Moreover, there was an excess of exports over im- 
ports of gold during 1892, which showed that even the 
remarkable credits in merchandise which we had accu- 
mulated abroad were not sufficient to offset the withdrawal 
of funds from the United States by foreign investors. 
The United States was not only asked to settle its in- 
debtedness abroad, but foreign creditors also refused to 
make any further commitments of capital in this country. 
Under the pressure of these conditions, the drain of gold 
from the country during subsequent years constantly in- 
creased. The exportation and importation of gold and 
the net exportation during the three fiscal years 1891-93 
was as follows: 

IMPORTS INTO AND EXPORTS OF GOLD FROM THE UNITED 
STATES, 1891-93. 



Year ending June 30. 



1891 
1892 
1893 



Imports. 



$18,232,507 
49,699,454 
21,174,381 



Exports. 



$80,362,654 

50,195,327 

108,080,844 



ExceBS of 

Exports over 

Imports. 



$68,130,087 

495,873 

87,506,463 



CONDITIONS IN UNITED STATES — 1891-93 91 

Up to the end of the fiscal year 1892, gold for export 
from the United States had been provided by drawing 
through the New York Clearing-House upon the gold 
reserves of the associated banks of that city. But, as al- 
ready seen, 1 this situation had been changed through the 
operation of the Silver Law of 1890 in causing balances to 
be settled at the New York Clearing-House in legal-tender 
notes. Subsequent to June, 1892, the check which a ster- 
ling banker received for his bill of exchange in London, 
after passing through the Clearing-House, was met in 
legal- tender notes. These notes could not be used in New 
York by the sterling bankers to pay their drafts on Lon- 
don, and the banks with which they carried deposits were 
unable to provide the necessary gold out of their own 
reserves. As a consequence, there were only two ways 
available to secure gold. In the first place, the necessary 
amount might be secured by offering a premium. Such 
action, however, would have constituted an assault upon 
the public credit, and an open acknowledgment of the 
depreciation of the currency of the country. On the other 
hand, greenbacks or Treasury notes might be carried to 
the Treasury and gold secured through their redemption. 
It was for this purpose — to protect the currency of the 
country from depreciation — that the Treasury gold 
reserve had been provided. Bankers, therefore, who 
needed gold for export, brought greenbacks to the Treas- 
ury to be redeemed. 

During the previous history of the Treasury but a very 
small amount of legal-tender notes had been thus pre- 
sented for redemption. The amount redeemed during 
the thirteen years 1879-91 had been only $34,000,000. 2 
But the expedient of withdrawing small greenbacks and 
substituting greenbacks of large denomination adopted 
by the Treasury officials in 1886, in order to make room 

1 See p. 88. 

2 Report of the Secretary of the Treasury (Finance), 1893, p. 13. 



92 



THE CAUSES OF THE PANIC OF 1893 



for silver certificates in the circulation, had resulted, as 
already pointed out, 1 in placing the greenbacks of large 
denomination in the reserves of the banks, where they 
were readily available to draw gold from the Treasury, 
in the event of an emergency such as confronted the coun- 
try during 1892. The Treasury notes of 1890 were also 
redeemable in gold, and, having through the redundancy 
of the currency accumulated in the bank reserves, might 
be quickly used in making demands on the Treasury. 
With the means thus at hand, rapid inroads were made 
upon the Treasury's stock of gold. The heavy exports of 
gold from the country during the latter half of 1892 and 
the early part of 1893 were almost wholly drawn from the 
Treasury by the presentment of Treasury notes and green- 
backs. The amount of notes redeemed during the three 
fiscal years 1891-93, and the connection between the re- 
demption of legal-tender notes and the flow of gold from 
the country, is shown in the following table : 

REDEMPTION OF GREENBACKS AND TREASURY NOTES AND 
EXPORTS OF GOLD, 1891-93. 



Fiscal 
Year. 


Greenbacks 
redeemed. 


Treasury Notes 
redeemed. 


Total 
Redemptions. 


Exports of 
Gold. 


1891 .... 


$5,986,070 




$5,986,070 


$86,362,654 


1892 .... 


5,352,243 


$3,773,600 


9,125,843 


50,195,327 


1893 .... 


55,319,125 


46,781,220 


102,100,345 


108,680,844 



This drain upon the Treasury gold reserve through the 
redemption of greenbacks and Treasury notes brought 
the existing apprehension as to the maintenance of gold 
payments to a disastrous climax. It has already been 
shown how the silver law of 1890 brought about a re- 
dundancy of the currency, and an accumulation of legal 
tenders in the New York banks as early as 1891. As a 
1 See p. 23. 



CONDITIONS IN UNITED STATES — 1891-93 93 



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94 THE CAUSES OF THE PANIC OF 1893 

result of this accumulation of legal-tender notes, as also 
pointed out, a constantly increasing percentage of the 
customs revenues, after the marketing of the grain crop 
of 1891, was received in greenbacks and Treasury notes. 
The inflow of gold to replenish the Treasury surplus was 
thus greatly curtailed. At the same time it was found that 
the outflow of gold from the Treasury was rapidly in- 
creased by the extravagant appropriations of the Fiftieth 
and Fifty-first Congresses. 1 To this alarming situation 
was now added the drain upon the gold reserves caused 
by the direct redemption of Treasury notes and green- 
backs. The Treasury gold reserve in short was being dis- 
sipated by Government expenditures and the redemption 
of legal-tender notes, while additional supplies of gold 
were being cut off through the displacement of gold in 
the customs receipts by the greenbacks and silver currency. 
As early as June, 1892, as will be seen in the accompany- 
ing chart, the Treasury gold reserve had been reduced 
to $114,231,883. In his report to Congress for that year 
Secretary Foster declared that the redemption machinery 
of the Government was in peril. 2 After this date the grow- 
ing redundancy in the silver circulation caused by the 
automatic issue of $50,000,000 Treasury notes annually 
was attended by increased hoarding of gold by the banks, 
heavier exports of gold from the country, and the present- 
ment of a larger amount of legal-tender paper at the Treas- 
ury for redemption. Under these influences, the gold 
reserve was maintained with increasing difficulty and the 
alarm over the Treasury situation became more pro- 
nounced and widespread. By the close of January, 1893, 
the gold reserve had declined to $108,181,713, a bare eight 
million dollars more than the danger minimum of $100,- 
000,000. 3 Conditions had reached such a critical stage 

1 Report of the Secretary of the Treasury (Finance), 1893, p. cxxviii. 

2 Ibid., p. xxix. 

3 Ibid., p. 75. 



CONDITIONS IN UNITED STATES — 1891-93 95 

early in February that Secretary Foster gave orders to the 
Bureau of Printing and Engraving to prepare plates for 
a bond issue under the provisions of the Resumption Act. 
About six or eight million dollars in gold, however, was 
obtained early in February from the New York banks 
in return for legal-tender notes, and with this assistance 
the Treasury was kept afloat until the finances of the Gov- 
ernment could be turned over to the incoming Cleveland 
Administration. 

When Secretary Foster turned over the control of the 
Treasury to the Democratic Administration, the gold re- 
serve was only $100,982,410, and the total of all other 
kinds of money in the Treasury was scarcely $25,000,000. l 
By April 15, Secretary Carlisle was forced to issue an order 
to suspend the further issue of gold certificates for gold 
deposited in the Treasury as required in the Act of July 
12, 1882, which stated that no more gold certificates should 
be issued when the gold in the Treasury "reserved for 
the redemption of United States notes falls below $100,- 
000,000." On April 22, the gold reserve actually fell below 
the $100,000,000 limit. Several days before this occurrence, 
the feverish condition of the money market and the anxiety 
over the currency situation were intensified by a rumor 
that Secretary Carlisle intended to abandon the policy 
of redeeming Treasury notes in gold. The Silver Law of 
1890, as already cited, authorized the Secretary to "re- 
deem such notes in gold or silver coins at his discretion." 
Since the gold reserve had declined to the statutory mini- 
mum, it was argued that Secretary Carlisle would tender 
only silver coins for these notes and thus place the coun- 
try upon a basis of silver payments. Secretary Carlisle, 
on April 20, announced that he would pay gold for Treas- 
ury notes so long as he had "gold lawfully available for 
that purpose." This reply still left the matter in doubt. 
Consequently it added to the existing alarm and caused 
1 Report of the Secretary of the Treasury (Finance), 1893, p. 75. 



96 THE CAUSES OF THE PANIC OF 1893 

an increase in the gold exports from the country. 1 Two 
days later, however, President Cleveland publicly declared 
that both the "President and his Cabinet are absolutely 
harmonious in the determination to exercise every power 
conferred upon them to maintain the public credit, to 
keep the public faith, and to preserve the parity between 
gold and silver and between all financial obligations of 
the Government." But the uneasiness of the country, 
which had been constantly increased by the undermining 
of the Treasury, refused to be allayed. On the contrary, 
it soon developed into a panic which was followed by wide- 
spread disaster. 

1 The exports of gold from New York and Boston during this week 
amounted to $8,000,000. 



CHAPTER VII 

THE CRISIS OF 1893 

The Collapse on the New York Stock Market. — Depression of Stock Values. 
— Run of Depositors upon Interior Banks. — Withdrawal of Banking 
Deposits from Eastern Reserve Centres, and the Resultant Deficiency in 
New York Bank Reserves. — The Stringency in the Money Market. — De- 
velopment of a Money Famine. — Issue of Clearing-House Certificates. — 
Mercantile and Industrial Failures. — Bank Suspensions and Failures. — 
Repeal of the Silver Purchase Clause of the Sherman Law and the Return 
of Confidence. 

The first evidence of the culmination of the long-felt 
uncertainty as to the maintenance of gold payments came 
in the shape of a collapse on the New York Stock Ex- 
change. The same reasons which had led British and 
European investors to distrust the currency situation in 
the United States had already affected Americans. The 
amount of new commitments of capital by American in- 
vestors had been steadily decreasing since the passage of 
the Sherman Law. 1 After the beginning of the year 1893 
this tendency assumed an aggravated form, manifesting 
itself not only in a lessened activity in new undertakings, 
but also in an endeavor to withdraw from old enterprises. 
During the first five months of 1893, when the condi- 
tion of the Treasury grew worse week by week, and the 
change from a gold to a silver basis of payments became 
more and more probable, investors became exceedingly 
anxious to dispose of their holdings of securities before 
the critical moment arrived. In the very nature of things 
they desired to realize on their investments before the gold 
standard of payments was abandoned. As this distrust 
of the currency developed and the efforts to realize were 
1 See p. 106. 



98 THE CAUSES OF THE PANIC OF 1893 

stimulated, there was a steady fall in stock quotations. 
The climax was reached immediately after the decline, on 
April 22, 1893, of the gold reserve below the danger-limit 
of $100,000,000. After that date the attempt on the part 
of investors to liquidate in the face of the general dis- 
trust of the Treasury situation was followed during the 
first week of May by a panic and a sharp fall in values on 
the New York Stock Exchange. 1 The rush of investors 
to sell their holdings affected adversely all classes of se- 
curities. Several brokerage firms were unable to protect 
themselves and were forced to suspend payments. The 
extent of the panic was also increased by the discovery 
that the stock speculation which had prevailed during the 
early months of the year had been stimulated by many 
questionable financial practices. 2 The depression in stock 
values which began under these conditions was increased 
by further developments in the currency situation, and in 
most cases continued until the end of the year. The extent 
of the decline in prices is apparent from the accompany- 
ing table (page 99), showing the opening, closing, and 
lowest quotations during 1893 of a few leading stocks at 
the New York Stock Exchange. 3 

This breakdown on the stock market was the begin- 
ning of widespread financial disaster. As a matter of fact 
it furnished an occasion for the outbreak of the general 
distrust of the currency situation which had been gaining 
strength since the beginning of the year. The discredit 
of the currency, or the fear as to the fixity of the gold stand- 
ard of payments, assumed outwardly the shape of a loss 
of confidence in banks and financial institutions. Bank 
depositors realized that in the event of the general liqui- 

1 Annual Supplement to The Commercial and Financial Chronicle, 
1894, Financial Review of 1893, pp. 8, 9. 

2 This was especially true in the case of the National Cordage Com- 
pany, the stock of which had been foisted upon the public through the 
manipulation of dividends by its directors. 

3 Annual Supplement to The Commercial and Financial Chronicle, 
1894, Financial Review of 1893, p. 7. 



THE CRISIS OF 1893 99 

RANGE OF LEADING STOCKS IN 1893. 



Opening. 



Lowest. 



Closing. 



Railroads. 

Baltimore and Ohio 

New York Central and Hudson.. 

Pennsylvania 

Atchison, Top. and Santa Fe . . . . 

Chicago, Mil. and St. Paul 

Illinois Central 

Northern Pacific (pref.) 

Union Pacific 

Chesapeake and Ohio 

Louisville and Nashville 

Miscellaneous. 

American Sugar 

American Tobacco Co 

National Cordage 

Pacific Mail Steamship 

United States Rubber Co. 

Western Union Telegraph Co. . . . 



94 

109 

54 

34 

77 
99 
47 
39 
22 
72 

111 

121 
138 

27 
46 
96 



54 July 27 
92 July 26 
46 Dec. 18 
9 Dec. 30 
46 July 26 
86 July 18 
15 Aug. 16 
15 July 26 
12 July 26 
39 Dec. 28 

61 July 26 
43 July 31 

7 Aug. 25 

8 July 27 
17 Aug. 17 
67 July 26 



67 
98 
48 
10 
56 
89 
18 
18 
16 
44 

81 
70 
20 
14 

42 
82 



dation of credit obligations which had been presaged by 
the panic in the stock market, financial institutions would 
not be in a position quickly to convert their assets into 
gold, and, on account of their small gold reserves, would 
be unable to pay their obligations in gold. This feeling, 
which was strong in the interior of the country and espe- 
cially prevalent over a wide section of the West and South, 
finally during the months of May and June led to a run 
upon many Western banks. Moreover, the Government 
and the banks were already hoarding gold, and it was but 
a short step to the hoarding of gold and specie by indi- 
viduals who feared that the country would be reduced to 
a depreciated silver currency as a basis of payments. This 
apprehension not only caused the hoarding of gold by 
individuals, but also led depositors in their rush upon 
interior banks to demand specie in payment of their 
accounts. 

Under the provisions of the National Banking Law, 
banks in the interior of the country are required to main- 



L0FC. 



ioo THE CAUSES OF THE PANIC OF 1893 

tain a cash reserve << jii.tl to fifteen per cent, of their de- 
posits. Only two fifths of this reserve, bowever, must 
necessarily be held in the vaults of the interior banks. 
The remaining three fifths may be kept on deposit at 
reserve banks in certain designated cities. Since the de- 
mand for loans was usually lighl in Western sections of 

the Country, except in llie harvest season, I Ik- bulk of the 

country's bank reserves bad come to be beld by certain 
Eastern reserve agents which usually paid two per cent. 

interesl lor the use of the funds. This was especially true 

during the years subsequent i<> L890. Mention has already 
been made of the Mow of legal-tender notes from the West 
lo the East after the harvest of L891, and of their accumu- 
lation in the hanks of New York. This movement was 
symptomatic of the general tendency of idle Western funds 

to move toward the East. During the two fiscal years 1891 

and 1892 the deposit by Western hanks of reserve funds 
in ihe East increased one third. During the same period 
Western deposits in New York City were doubled. At the 

close of the year 1892 I lie deposits of interior hanks in 

Eastern centres amounted lo $204,000,000.* All of this 
immense amount was payable on demand. When the 

run of depositors upon Western and oilier interior hanks 

began in May, these institutions, therefore, in order lo 
meel the pressing demands for cash, ai once recalled their 

reserves and other funds which they had on deposit in the 

East. 

The effed of this action upon Ihe New York hank de- 
posits and reserves at once became evident. During - the 

month of -lime ahonl $33,000,000 of deposits were with- 
drawn from the Clearing-House banks. The withdrawal 
of cash to the interior steadily continued during the next 
two months. The deposits of the Clearing-House hanks, 
which were $431,000,000 in round numbers on June ■'>. 

1 Noyes'a Thirty Years of American Finance, i>. 190. liquet of the 
Secretary of the Treasury, 1893 (Finance), pp. 181, 188. 



THE CRISIS OF 1893 



101 



had been redueed by August 29 to $370,000,000. As a 
consequence of this strain, the reserves of the New York 
Associated Banks fell below the statutory minimum of 
twenty -five per cent, on July 8, and the deficiency thus 
begun continued until September 9. The greatest deficit 
was one of $10,545,375 on August 12. The movement 
of funds to the interior of the country, and the resultant 
decrease in the reserves and deposits of New York banks 
from June to September, may be readily seen from the 
following figures showing the deposits, reserves, and ratio 
of reserves to deposits of the New York Clearing-House 
banks : l 

NEW YORK CLEARING HOUSE BANKS. DEPOSITS, RESERVES 
AND RATIO OF RESERVES TO DEPOSITS, JUNE-SEPT., 1893. 

(000's omitted.) 



Wrrk 

ended 


Deposits. 


Specie. 


Legal 
Tenders. 


Reserves to 
Deposits. 
Per Cent. 


Surplus Reserve. 


June 3 . . 


$431,411 


$70,156 


$58,681! 


29.8 


$20,987 


10 .. 


418,926 


69,529 


46,623 


28.4 


14,420 


17 .. 


I06,. r >:56 


(IS.'JIS 


42,192 


27.1 


8,776 


24 .. 


:{«)s,064 


65,023 


89,074 


26.3 


5,481 


July 1 . . 


397,979 


(i'J,!)SS 


37,758 


25.3 


1,251 


8].. 


398,079 


61,708 


82,884 


23.7 


5,082 deficit 


15.. 


394,174 


62,268 


82,005 


23.9 


4,269 deficit 


22 .. 


390,476 


68,858 


32„ r )0!) 


24.6 


1,256 deficit 


29 .. 


38^,177 


62,681 


28,610 


23.8 


4,301 deficit 


Aug. 5 . . 


872,640 


65,884 


23,265 


21.2 


14,017 deficit 


12 .. 


372,203 


58,624 


22,880 


20.5 


16,545 deficit 


19 .. 


870,802 


58,852 


22 177 


21.7 


12,045 deficit 


26 .. 


370,479 


62,980 


22,951 


23.1 


6,736 deficit 


Sept. 2.. 


374,010 


66,960 


25,074 


24.5 


1,567 deficit 



The rapid withdrawal of specie and currency from New 
York, as shown above, and from other Eastern money 
centres, by banks in the West and South, was of course 
followed by a large diminution of the money supply of 
New York and other Eastern cities. The existing supply 

1 Annual Supplement, The Commercial and Financial Chronicle, p. 23, 
Financial Review, 1894. 



102 THE CAUSES OF THE PANIC OF 1893 

was further depleted by the general withdrawal of savings 
and deposits from financial institutions, on account of the 
fear that silver and notes redeemable in silver would fall 
much below gold values. At the same time the curtail- 
ment of bank loans, the general rush to liquidate all forms 
of obligations, and the necessity for funds to provide new 
margins for holdings of securities, created an unusual and 
intense demand for legal money of all kinds. There was, 
in short, a remarkable shrinkage in the Eastern money 
supply in the face of an intense demand for money, and 
the logical result of the situation was an extraordinary 
increase in the rates on call loans and commercial paper. 
During the latter part of June the rates for call loans in 
New York ranged as high as seventy-four per cent. On 
July 28 the rate was seventy-two per cent., and on August 
4 fifty-one per cent, was demanded. During these same 
months the rates on first-class commercial paper ranged 
from eight to twelve per cent. These high quotations were 
practically nominal, however, for the reason that only a 
very small amount of funds could be secured even at these 
unusual rates of interest. The extraordinary stringency 
in the New York money market from the close of June 
to the beginning of September is at once apparent from 
a glance at the accompanying table, on the next page, 
which shows the weekly quotations for call loans and 
commercial paper during this period. 1 

On account of the constantly growing demand for money 
from far and near, the hoarding of money by individuals, 
and the universal desire to convert goods, securities, and 
all descriptions of obligations into gold because of the fear 
of a reversion to a silver standard of payments, the tight- 
ness in the money market finally developed into a money- 
famine. Time-loans were scarcely obtainable. Many city 
banks adopted the extreme measure of refusing to cash 

1 Annual Supplement, The Commercial and Financial Chronicle, p. 53, 
Financial Review, 1894. 



THE CRISIS OF 1893 



103 



RATES FOR CALL LOANS AND COMMERCIAL PAPER AT NEW YORK 

JUNE-SEPTEMBER, 1893. 



Week ending Friday, 



June 2 

9 

16 

23 

30 

July 7 
14 
21 
28 

Aug. 4 
11 
18 
25 

Sept. 1 



Call Loans. 



2 to 5 

2 to 12 

to 25 

to 25 

to 74 

to 25 

to 20 

to 11 

2 to 72 

2 to 51 

2 to 6 

2 to 6 

3 to 7 
2 to 6 



Prime Paper. 



6 to 9 

6 to 7 
6£ to 8 

7 to 15 

8 to 12 
8 to 12 
8 to 12 
8 to 12 
8 to 12 
8 to 12 
8 to 12 
to 12 
to 15 
2 to 18 



the checks of their own depositors, except in cases where 
it could be shown that the money was absolutely necessary 
for personal and business uses. Finally, during the early 
part of August, a premium was offered for gold, silver, 
notes, or currency of any kind, and various kinds of media 
of exchange were devised and used by business and in- 
dustrial concerns in the payment of wages and other trans- 
actions. 1 Despite these expedients, however, the premium 
on money lasted throughout the month of August, varying 
from one to five per cent, without regard to the kind of 
money obtained. Under the pressure to get anything with 
which to settle the next day's obligation, gold, silver, and 
paper were all eagerly accepted and rose to the same 
premium. 2 

In addition to the device of offering a premium for 
money, three other plans were adopted for relieving the 
currency famine. In the first place, national banks de- 

1 " The Currency Famine of 1893," John De Witt Warner, Sound 
Currency, vol. ii, no. 6 (February 15, 1895), p. 339. 

2 This was a curious phase of a money stringency which had been 
caused by the distrust of a silver currency, but, as a matter of fact, it 
was only an incident of the existing situation and showed no confidence 
in silver. 



104 THE CAUSES OF THE PANIC OF 1893 

posited United States bonds with the Comptroller of the 
Currency, and thus increased their note circulation. In 
the second place, Clearing-House certificates were issued in 
large amounts. Finally, Clearing-House certificates were 
used by a combination of New York bankers as a credit 
to facilitate the importation of gold from abroad. From 
these three sources the amount of available currency 
during the two months of July and August was increased 
to the extent of $128,831,276, divided as follows: l 

Clearing-House certificates, in four Atlantic cities 2 . . . . $62,165,000 

Imports of gold into the United States 46,398,930 

Increase in national bank circulation 20,267,346 

Total increase in two months $128,831,276 

Clearing-House certificates were first issued freely in 
New York City on June 21, in an attempt to break down 
the extraordinary rates for loans. Similar issues had 
already been made in Philadelphia as early as June 16, 
and during the latter part of August and the beginning 
of September, Boston, Baltimore, and Pittsburg followed 
suit. The extent of the movement and the amount of 
loan certificates issued in the cities named are indicated 
in the following table : 3 



City. 


Date of Issue of 
First Certificate. 


Date of Largest Amount 
Outstanding. 


Largest 

Amount 

Outstanding. 


New York .... 
Philadelphia . . 
Boston 


June 21 
June 16 
June 27 
June 27 
Aug. 11 


Aug. 29 to Sept. 6 
Aug. 15 

Aug. 23 to Sept. 1 
Aug. 24 to Sept. 9 
Sept. 15 


$38,280,000 

10,965,000 

11,445,000 

1,475,000 

987,000 



Total $63,152,000 



1 Annual Supplement, The Commercial and Financial Chronicle, p. 31, 
Financial Review, 1894. 

2 This total does not include the $987,000 in loan certificates issued 
by the Pittsburg banks as shown in a subsequent table. 

3 Treasury Report, 1893, p. 358. 

The issue of Clearing-House certificates greatly exceeded that of pre- 
vious years. In 1873 the New York Clearing-House Association issued 



THE CRISIS OF 1893 



105 



These efforts on the part of the banks to provide cur- 
rency and other means of payments tended to mitigate 
the severity of the crisis and to assist many business and 
industrial concerns which were in dire straits. They were 
not powerful enough, however, to prevent extensive 
financial and industrial losses. 

The depression in stock values has already been re- 
viewed. 1 On the other hand the mercantile and indus- 
trial failures throughout the year were phenomenal. 
The aggregate liabilities of mercantile and industrial 
establishments which failed in 1893 were three times as 
great as the liabilities embraced in the failures of 1891, 
and almost twice as great as those of the panic year 
1890. The total number of failures during 1893, and the 
liabilities involved, exclusive of railroads and banks, is 
given below. 2 For purposes of comparison the returns 
for 1892 are also added : 



MERCANTILE AND INDUSTRIAL FAILURES, 1892-93. 





First 


Second 


Third 


Fourth 


Total. 




Quarter. 


Quarter. 


Quarter. 


Quarter. 


1893. 












Number . . . 


3,202 


3,199 


4,015 


4,826 


15,242 


Liabilities. . 


47,338,300 


121,582,539 


82,470,040 


95,389,010 


346,779,889 


1892. 












Number . . . 


3,384 


2,119 


1,984 


2,857 


10,344 


Liabilities.. 


39,284,349 


22,989,331 


18,659,235 


33,111,252 


114,044,167 



An examination of these figures reveals two interesting 
facts relative to the disastrous conditions which prevailed 
during 1893. In the first place they show that the mer- 
cantile and industrial failures began to increase before 
1893. The reason for this is plain. The distrust in for- 

only $26,565,000, and the Philadelphia Clearing-House $6,785,000. In 
1890, as already seen, the total issue of Clearing-House certificates by 
New York, Philadelphia, and Boston banks was $29,140,000. 

1 See p. 99. 

2 Compiled from the Annual Supplement, The Commercial and Finan- 
cial Chronicle, p. 17, Financial Review, 1894. 



106 THE CAUSES OF THE PANIC OF 1893 

eign countries as to the American currency situation, as 
already seen, had led to the withdrawal of foreign capital 
invested in this country. At the same time further com- 
mitments of capital were refused. Moreover, the distrust 
in the ability of the Treasury to maintain gold payments 
soon affected Americans as well as foreigners, and made 
them exceedingly cautious in entering into new inter- 
prises. 1 The result was that industrial and trade activity 
were curtailed on every side. Prices also declined and the 
margin of profits gradually grew smaller. Under these 
conditions, the weaker industrial and mercantile con- 
cerns experienced difficulty in maintaining their solvency, 
and as a consequence the amount of failures during the 
last quarter of 1892 and the first quarter of 1893 showed 
a decided increase. With the growth of distrust of the 
currency situation and the resultant stringency in the 
money market during the spring and summer of 1893, the 
difficulty of conducting business was intensified, and only 
the strongest corporations and mercantile houses were 
able to continue operations. As it was, many of these were 
forced to suspend, and the smaller establishments which 
had been already weakened by the depressed conditions 
prevailing during the previous year were forced to close 
their doors. 2 

To these widespread mercantile and industrial failures 
during 1893 there was also added the collapse of a number 
of great railway corporations, such as the Reading, the 
Northern Pacific, the Union Pacific, the Atchison, Topeka 
and Sante Fe, the Erie, and the New York and New Eng- 
land. The most prominent feature of the crisis during the 
summer of 1893, however, as well as the most distinctive 

1 This tendency was clearly apparent in the decline of new listings 
of stocks and bonds on the New York Stock Exchange. New issues of 
stocks and bonds were $23,000,000 less, in round numbers, in 1892 than 
in 1891, and the listings for 1893 were $42,000,000 below the reduced 
level for 1892. Annual Supplement, The Commercial and Financial 
Chronicle p. 13, Financial Review, 1893. 

2 Ibid., 1894, pp. 16-18, Crisis of 1893 and the Year's Failures. 



THE CRISIS OF 1893 



107 



and exceptional, was the numerous bank failures and 
suspensions. During the five years preceding 1893 there 
had been an annual average of about twelve national bank 
failures. About forty-four banks each year also had gone 
into voluntary liquidation. In comparison with these 
figures, 158 national banks suspended, and 46 went into 
voluntary liquidation, during the first nine months of 1893. 
Of the national banks which suspended, three were located 
in the Middle States, 38 in the South, 49 in the West, 
and 66 in the Pacific States and territories. 1 Private 
banks and financial institutions also came in for a propor- 
tional share of disaster. The entire number and classes of 
banks and financial establishments which suspended and 
those which resumed, from January 1 to September 1, 
1893, together with their assets and liabilities, is shown in 
the following table, compiled by the Comptroller of the 
Currency : 3 

BANKS, ETC., WHICH SUSPENDED, JAN. 1 TO SEPT. 1, 1893. 



Class. 


Number. 


Assets. 


Liabilities. 




172 

47 

13 

6 

177 


$41,281,848 

17,673,938 

14,337,500 

760,803 

20,237,259 


$36,903,266 


Savings Banks 

Loan and Trust Companies . . 

Mortgage Companies 

Private Banks 


16,830,809 

22,354,000 

1,790,000 

19,315,455 








415 


94,291,348 


97,193,530 



The financial and industrial chaos which was produced 
by these unprecedented bank failures reigned throughout 

1 Treasury Report, 1893 {Report of Comptroller Eckels), pp. 347-349. 
The number of suspensions in the South and West was especially 

great for the reason that the banks in those sections of the country had 
extended their loans during the year 1892. When the run of depositors, 
as already described, upon these institutions was started in June, the 
banks were not able to convert their assets into a liquid form and in many 
cases the demands of depositors were so pressing that the banks were 
compelled to close their doors at a time when their reserve deposits were 
already on the way to them, having been shipped from Eastern centres* 

2 Treasury Report, 1893 (Report of Comptroller Eckels), p. 351. 



108 THE CAUSES OF THE PANIC OF 1893 

the summer of 1893. The turning-point came during the 
latter part of August. On the 30th of June President 
Cleveland issued a call for Congress to meet in extraordin- 
ary session on the 7th of August. Shortly after the con- 
vening of Congress a bill repealing the silver purchase 
clause of the law of 1890 was introduced in the House, and 
after a sharp debate was passed, on August 28, by a major- 
ity of 131 votes. Although the Senate delayed action until 
October 30, when it finally passed the measure, the unex- 
pected vote of the House restored confidence in the coun- 
try's financial integrity, and marked the close of the most 
acute period of the crisis. Contemporary evidence of this 
fact was furnished by an authoritative financial journal 
which made the following significant comment on the situa- 
tion : l 

"This [the vote of the House] was the turning-point of the 
whole financial crisis of 1893; confidence was restored like 
magic; money began to come back into the banks and kept on 
accumulating, until on December 30 the surplus reserve of the 
New York banks reached $80,115,150; the Clearing-House 
certificates were drawn in gradually, and by November 1 all 
were canceled. After the decisive vote in the popular branch 
of the National Legislature the country never lost confidence, 
and ultimate repeal was considered certain notwithstanding 
the desperate opposition in the Senate." 

After the first week in September the money market 
relaxed until funds were loaned on call in New York during 
the latter part of December at the unprecedented rate of 
| of one per cent. A revival on the stock market followed, 
and a large share of the losses in stock values during the 
summer were recovered by the end of the year. But 
the influence of the extraordinary failures during the acute 
period of the crisis, and the burden of silver obligations 
which had been issued by the Government since 1878, still 

1 Annual Supplement, The Commercial and Financial Chronicle, p. 2, 
Financial Review, 1894. 



THE CRISIS OF 1893 109 

remained, and marked out a precarious future both for the 
Treasury and for the trade and industry of the country. 
It is not necessary, however, to enter into these subsequent 
years of trade and industrial stagnation, and of Govern- 
ment fiscal and monetary difficulty. The movements which 
culminated in the financial and industrial breakdown 
during the summer of 1893 have already been traced in 
considerable detail. The nature and extent of the cata- 
strophe have also been described. Consequently the object 
of the investigation has been attained since a position has 
now been reached where a conclusion may be safely drawn 
as to the cause of the crisis. 



CHAPTER VIII 

THE CAUSE OF THE CRISIS OF 1893 

The Crisis of 1893 cannot be ascribed to a Continued Operation of the Forces 
which caused the Panic of 1890 in the United States. -*- During the Period 
1891-93 Financial and Industrial Conditions in Great' Britain, Germany, 
and France showed a Healthy Development. — Hence the Crisis of 1893 in 
the United States did not arise from any Difficulties Abroad. — The Crisis of 
1893 was Local in its Occurrence and Cause. — It was not due to an Ex- 
tension of Mercantile and Industrial Credits or to a Scarcity of Money in the 
United States. — It was a Monetary Crisis caused by Widespread Appre- 
hension as to the Fixity of the Gold Standard of Payments. 

In attempting to reach a decision as to the cause, or 
causes, of the crisis of 1893 in the United States, it is evi- 
dent, in the first place, that the crisis of 1893 was not due 
to a continuation of those forces which brought about the 
panic in this country during the autumn of 1890. The 
stringency in the American money market, the collapse of 
stock values, and the resultant industrial and financial 
failures in the United States during that year, as already 
seen, were a reflection of the state of affairs which had been 
precipitated in Great Britain by English speculation in 
Argentina and other countries. In the fall of 1890 Great 
Britain, in the height of her distress, found it necessary to 
recall part of the funds which she had invested in American 
railroads, and to sell in this country part of her holdings of 
American and other negotiable securities. 

But the necessity for this forced sale of securities in the 
United States by British investors, as already pointed out, 
had soon ceased. 1 The combined action of the Bank of 
England and the financial houses of London in guarantee- 
ing the assets of the firm of Baring Brothers and in freely 
extending bank accommodations prevented a severe panic 

1 See p. 79. 



THE CAUSE OF THE CRISIS OF 1893 111 

in Great Britain. A large measure of confidence was soon 
restored, and loans were obtainable on easy terms. By the 
first of April, 1891, the discount rate of the Bank of Eng- 
land had been reduced to 3 per cent. In June, 1891, the 
rate fell to 2\ per cent., and the average for the entire year 
was 3 jAj- per cent. The average market rate for the year was 
ly 6 j per cent, lower than the rate of the Bank of England. 
Under these conditions British investors and financial houses 
could easily obtain loans on gilt-edged securities, and were 
not compelled, therefore, to sell securities in the United 
States in order to meet their own financial necessities. 
Moreover, after the immense grain crop in the United 
States during 1891, as already indicated, gold was imported 
from Great Britain by the United States. In the autumn 
of 1891 American railroad stocks and bonds were also 
favored purchases on the London Stock Exchange, and at 
the close of that year the entire list of American railroad 
securities showed an increase in value as compared with 
the closing quotation of the year 1890, ranging from four to 
twenty per cent. 1 Had the currency situation in the United 
States been sound at that date, there would have been no 
further recall of British capital or return of American 
securities by British investors. It is true that during the 
two subsequent years, as already seen, there was a con- 
stantly growing tendency on the part of Great Britain and 
other foreign countries to realize on their investments in 
the United States. 2 But the sale of securities by foreigners 
in this country and the outflow of gold from the United 
States during these years was due to a set of forces entirely 
different from those which caused the return of American 
securities in 1890 by British investors. In 1890 British 
holders of American securities were forced to adopt this 
policy in order to realize funds to meet their own obliga- 

1 Annual Supplement, The Economist (London), vol. 50 (February 20, 
1892), p. 36, Commercial History and Review of 1891. 

2 See p. 89. 



112 THE CAUSES OF THE PANIC OF 1893 

tions; during the subsequent years, 1891-93, they were 
constrained to sell American securities by the fear that the 
United States would be unable to maintain gold payments. 
The Baring failure, in short, and the consequent liquidation 
in Great Britain had no influence upon conditions in the 
United States after the early part of the year 1891, and the 
financial collapse in the United States during 1893 cannot 
possibly be ascribed to a continued operation of the causes 
which were responsible for the panic of 1890 in this country. 

It is equally apparent, in the second place, that the crisis 
of 1893 did not arise from any other causes which had their 
origin outside of the United States. This conclusion is 
incontrovertible, for the reason that financial and industrial 
conditions in other commercial nations during the three 
years, 1891-93, were not marked by any developments 
which could have possibly reacted disastrously upon this 
country. On the contrary, foreign countries during this 
period suffered severely from the state of affairs in the 
United States. 

Industrial and financial affairs in Great Britain during 
the three years, 1891-93, were conducted with such caution 
and conservatism as to contrast sharply with the previous 
period of reckless speculation. The confidence of investors 
in domestic enterprises was weakened by the discovery of 
the rash and corrupt financial practices which came to 
light through the publicity attached to the liquidation of 
the numerous trust companies and other concerns which 
had figured so prominently in the speculative movement 
that had absorbed such a large amount of the savings of 
the public in the years preceding 1890. At the same time 
the growing apprehension in Great Britain after 1891 over 
the currency situation in the United States, the default of 
the Uruguayan Government in 1892, the political revolution 
in Brazil in 1893, the development of a banking crisis in 
Australia in the same year, together with the continued 
state of uncertainty relative to Argentine finances, also had 



THE CAUSE OF THE CRISIS OF 1893 113 



the effect of impairing the confidence of British investors 
in foreign industrial and financial undertakings. .' They 
refused to place their funds in any investments except 
first-class securities. As a consequence the amount of new 
capital commitments in Great Britain steadily decreased. 1 
Although the discount rates were low, 2 the stock market 
was depressed, and there was an entire absence of specula- 
tion. 

This financial depression was strongly reflected in the 
domestic industry of the United Kingdom. The countries 
of Central and South America were unable to get the credit 
which they had formerly enjoyed in London, and conse- 
quently were forced greatly to lower their purchases of 
British goods. The market for British commodities in the 
United States was also curtailed by the prohibitive rates 
of the McKinley tariff law, and the industrial and financial 
crash in this country during 1893. (On account of the depres- 
sion existing in Germany and France, those countries also 
reduced their purchases in Great Britain. The foreign 
trade of the United Kingdom during the period 1890-93 
steadily declined, and it was not until the year 1895 that 
any pronounced upward movement developed. 3 

1 The total capital created and issued in Great Britain during the 
four years 1890-93 was as follows : 

1890 £142,565,000 

1891 104,594,910 

1892 81,137,177 

1893 49,141,188 

2 The average discount rate of the Bank of England, and the average 
market rate during the years 1890-93 was as follows : 





Bank of England. 
Per Cent. 


Market. 
Per Cent. 


1890 


4/10/ 4 
3/ 5/11 
2/ 9/11 

3/ 1/ 4 


3/13/11 

2/10/ 
1/ 9/ 5 

2/ 2/ 


1891 


1892 


1893 





3 The foreign trade situation in Great Britain during the period 



114 THE CAUSES OF THE PANIC OF 1893 

This reduction in the volume of foreign trade, as a matter 
of course was attended by a decreased activity in domestic 
trade and industry. 1 ,' Although the volume of interior trade 
was maintained, prices were lower and profits smaller. 
The entire period 1891-93 in Great Britain, in short, was 
marked by the continued effort to liquidate past losses,- to 
avoid future excesses, and to conduct financial and indus- 
trial operations on a safe and conservative basis. These 
efforts were in the main successful. Trade and industry, 
'in view of the many adverse influences which they had to 
encounter, both at home and abroad, made a remarkably 
good showing, and met with no serious disasters. Each 
year after 1890 the financial structure was placed on a 
more sound and solid basis, and the movement away from 
the disastrous conditions which had been precipitated by 
the financial collapse in 1890 was steadily maintained. 2 
( Conditions similar to those in Great Britain prevailed in 
Germany. The reckless speculation in that country which 
culminated in the financial collapse of 1889 was followed 
by financial and industrial depression up to the close of the 
year 1893y In a previous chapter it was ascertained that the 
year 1890 in Germany was marked by a decline in stock 

1890-93 appears in the following table, which shows the increase or de- 
crease per cent, of the volume of foreign trade as compared with previous 
years; 





Total Imports and 
Exports. 
Per Cent. 


Exports of 

Home Produce. 

Per Cent. 


1890 


0.39 decrease 
0.25 decrease 
1.17 decrease 
1.68 decrease 


0.51 decrease 


1891 


5.30 decrease 


1892 


3.43 decrease 


1893 


2.10 decrease 







1 London Hankers' Clearing-House returns decreased from £7,801,- 
048,000 in 1890 to £6,478,013,000 in 1893. Railroad traffic receipts 
were reduced from £82,902,000 in 1891 to £30,632,900 in 1893. A part 
of the decrease in 1893, however, was due to mining strikes which cur- 
tailed shipments of coal. 

2 Annual Supplement, The Economist (London), vols. 1-lii, Commer- 
cial History and Review, 1891-93, 



THE CAUSE OF THE CRISIS OF 1893 



115 



values and a liquidation of past excesses. 1 During the 
three subsequent years this process continued. The taste 
for capital adventure was lost. The public was exceedingly 
timid about placing its funds in new enterprises, and only 
first-class securities were purchased. Almost all descrip- 
tions of stocks and bonds decreased in value. Conse- 
quently there was a steady reduction in the amount of Ger- 
man capital commitments, and in the number and total 
capitalization of joint-stock companies organized. 2 Idle 
funds accumulated in the banks, and the rates of discount 
were low. 3 In the domain of trade and industry this finan- 

1 See p. 69. 

2 The total capital commitments in Germany during the period 
1890-94 was as follows. From a comparison of the figures it will be seen 
that there was a marked decrease during the three years 1889-92, and 
an upward movement commencing with the year 1893. 

TOTAL CAPITAL COMMITMENTS IN GERMANY. 



1889 
1890 
1891 
1892 
1893 
1894 



Million Marks. 



1745 
1520 
1217 
1016 
1266 
1289 



Practically the same tendency is evident from a comparison of the 
number and capitalization of joint-stock companies organized during 
the same period: 





Number of 
Companies. 


Total Capital 
(Million Marks). 


1889 


360 
236 
160 
127 
95 
92 


402.54 


1890 


270.99 


1891 


90.24 


1892 


79.82 


1893 


77.26 


1894 


88.26 







Le Marche Financier, 1894-95, A. Raffalovich, pp. 107-108. 

3 The average bank rate of discount at Berlin was 3.81 per cent, in 
1890, 3.09 per cent, in 1891, 1.79 per cent, in 1892, 3.21 per cent, in 
1893, and 1 .77 per cent, in 1894. — Le Marche Financier en 1894, p. 113. 



11G THE CAUSES OF THE PANIC OF 1893 

cial prostration of the country was severely felt, and was 
evidenced, as in Great Britain, by lower prices and a re- 
duced margin of profits. 

Even under these adverse conditions, however, industry 
and business were remarkably well sustained. Germany 
suffered no shortage in her agricultural production during 
the year 1892, when the wheat harvests in France and 
Russia were almost total failures. The German grain crop 
of 1893 was also satisfactory. Under these conditions the 
work of financial recuperation was steadily pushed for- 
ward. Losses were written off, over-commitments of cap- 
ital were reduced, and on every side a general policy of 
retrenchment was pursued. The result was that German 
domestic trade and industry gave evidence of a revival as 
early as 1893, and during the following year there was an 
increase in foreign and interior trade, and a general move- 
ment toward more prosperous conditions. Railroad traffic 
receipts were better, bank clearings were larger, the volume 
of capital emissions was greater, and bank and industrial 
stocks were quoted at higher prices. 1 Germany, in short, 
during the latter half of 1893 began to free herself from the 
liquidation of the previous three years, and to enter upon 
a period of unchecked prosperity/ 

The financial and industrial situation in France during 
the period 1891-93 was somewhat different from that in 
Great Britain and Germany, for the reason, as already 
seen, that France had fortunately been prevented by the 
failure of the copper syndicate and the Panama Canal 
Company from entering into the reckless speculation which 
characterized the German and English financial situation 
during the years immediately preceding 1890. Conse- 
quently there was no heavy liquidating movement in France 
after that year such as prevailed in Great Britain and Ger- 
many. Moreover, during these same years, French trade 
and industrial movements were depressed, partly by the 

1 Lc Marvin' Financier en 1894, Le Marche dv Berlin, pp. 83-124. 



THE CAUSE OF THE CRISIS OF 1893 117 

refusal of French investors to place their capital in new 
enterprises, and partly by the effect of adverse conditions 
which existed in foreign countries. At the same time there 
were no evidences of any speculation or of the commitment 
of capital in hazardous undertakings. The Paris Bourse 
was firm, and more activity was displayed than at London 
or Berlin. Financial institutions were in excellent condi- 
tion, large amounts of idle funds were accumulated, and the 
rates of discount were low. The condition of trade and 
industry also was not of a nature to cause serious anxiety. 
Toward the close of the year 1892 there was a change for 
the better Encouraged by a similar movement in England, 
French investors seemed to regain confidence, and em- 
barked in extensive mining operations in South Africa. 
During the following year large issues of Government 
securities were followed by the development of an upward 
movement in prices on the Paris Bourse. The timidity 
of investors and speculators disappeared. Foreign and 
domestic trade also showed decided improvement, and 
a general movement toward more prosperous conditions 
was inaugurated. 1 
I From this brief summary of financial and industrial con- 
ditions in Great Britain, France, and Germany during the 
period 1890-93 it is clearly evident, therefore, that the 
crisis of 1893 in the United States could not have been due 
to any difficulties abroad.) The general situation in Great 
Britain and Europe during these years was marked by a 
steady upward movement from a condition of financial de- 
pression to one of prosperity. Germany and France at the 
close of 1893 were entering upon a trade and industrial 
revival. Great Britain followed their lead in the early part 
of the year 1894. Consequently there were no conditions 
in these countries which were analogous, or had any causal 
connection with the financial crisis in the United States. 
The conclusion is irresistible that the disastrous break- 

1 Le Marche Financier en 1894, pp. 1-26. 



118 THE CAUSES OF THE PANIC OF 1893 

down in the United States during the summer of 1893 was 
local, not only in its occurrence, but also in its cause, or 
causes, and that it is not necessary to go beyond the 
borders of this country in search of an explanation of the 
calamity. 

But what was the local and the true cause of the crisis of 
1893 in this country ? Perhaps it has already been inferred 
from the review of developments in the United States 
during the years preceding 1893. In the light of these 
developments, the financial breakdown in 1893^ cannot 
be said to have been due to a scarcity of money' in the 
United States at that time, for the Silver Act of 1878 had 
increased the available circulation $378,000,000, in round 
numbers, and after 1890 the Sherman Law added some- 
thing like $50,000,000 annually to the circulating medium 
of the country. During the entire period 1878-93 the 
amount of money in circulation more than doubled. 1 Con- 
sequently the money supply was ample. On the other 
hand, it cannot be maintained that the crisis of 1893 was 
caused by an extension of mercantile credits such as 
brought about the disastrous collapse of 1873, for it has 
already been pointed out 2 that business houses and indus- 
trial establishments during the period 1891-93, instead of 
extending,'" were curtailing their operations, and were 
arranging their plans in the expectation of a breakdown 
in the financial machinery of the country. They could not 
have engaged in any extended or hazardous activities if 
they had been inclined to do so, for the reason, as already 
seen, 3 that very little, if any, foreign capital was obtainable 
for investment in the United States after 1891, and Ameri- 
can capital likewise refused to enter into doubtful financial 
or industrial undertakings. So far as the withdrawal of 
foreign and domestic funds, however, brought about in- 
dustrial and business disaster, it was not a direct cause 

1 Report of the Secretary of the Treasury, 1893, p. cxv. 

2 See p. 105. 3 See p. 105 et seq. 



THE CAUSE OF THE CRISIS OF 1893 119 

of the crisis, but only the result which flowed out of the 
operation of the primary and fundamental cause. 

This cause to which the crisis of 1893 is directly and 
wholly attributable consisted of a widespread fear, both at 
home and abroad, that the United States would not be able 
to maintain a gold standard of payments. The very nature 
of the crisis itself of 1893 bears out this conclusion. It 
was essentially a monetary crisis, and its typical feature 
consisted in the numerous failures of banks and financial 
institutions. Moreover, the precipitation of and the 
recovery from the crisis furnishes additional evidence to 
bear out the foregoing claim. The beginning of the crisis, 
as already seen, was marked by the decline of the Treas- 
ury gold reserve, on April 22, below the $100,000,000 
limit; the ending of the resultant industrial and financial 
chaos dated from the repeal, on August 28, of the Silver 

Law of 1890. 

The apprehension in 1893 as to the fixity of the gold 
standard of payments arose indirectly out of the silver 
agitation and legislation during the period 1878-90, and 
was directly traceable to the operation of the Sherman Silver 
Purchase Law of 1890. For seventeen years, 1878-90, the 
gold standard of payments was constantly threatened, and 
the crisis of 1893 was practically the culmination of this 
long period of uncertainty. Under the operation of the 
Silver Act of 1878, as already seen, the country received 
a serious shock to its confidence in the fixity of the gold 
standard. During the two years, 1884-86, when the silver 
issues of the country became redundant, the distrust in the 
ability of the Treasury to maintain gold payments became 
so great that gold was withheld in the payments of customs 
duties, and silver certificates worked off on the Treasury. 
Additions to the Treasury's supply of gold were thus cut 
off, and the gold reserve declined to $115,000,000 (see 
Chart II, p. 93). As a consequence, apprehension as to 
the maintenance of gold payments became widespread, 



120 THE CAUSES OF THE PANIC OF 1893 

and a panic was narrowly averted. 1 As it was, the stream 
of silver was only prevented from overflowing the Treasury 
by the action of the Treasury officials in employing arti- 
ficial devices to create a vacuum in the circulation. Con- 
fidence was thus temporarily restored, and during the 
period 1886-90 gold payments were made into the 
Treasury. The Treasury gold reserve increased by the 
year 1890 to $195,000,000 (see Chart II, p. 93). 

The advocates of the free coinage of silver, however, 
held the balance of political power during the first session 
of the Fifty-first Congress, and as a result of their agitation 
the Sherman Law was passed, and, as already shown, 
almost doubled the amount of silver obligations annually 
issued by the Government. The country might have pro- 
gressed safely under the Act of 1878, but the question of the 
fixity of the gold standard was opened afresh by the opera- 
tion of the Sherman Law. The currency of the country soon 
became redundant, and, as had happened in the two years 
1884-86, silver certificates and Treasury notes were used 
in the payments of public dues, while gold was hoarded. 
Consequently the Treasury gold reserve rapidly declined, 
and fear for the maintenance of the standard again arose. 
Because its supplies of gold were decreased by the displace- 
ment of gold by silver currency in the Government revenues, 
the Treasury adopted the policy of hoarding gold and 
making its payments through the New York Clearing- 
House in the form of legal-tender notes. This action led to 
a further impairment of confidence. Foreign investors and 
exporters saw the danger in the situation even before the 
people of this country, and began to withdraw the funds 
which they had invested in this country during the period 
1886-90. Moreover, they called for the payment of trade 
balances in gold. Gold was, therefore, demanded for export. 
But the banks in the United States were hoarding gold, 
and gold for export could practically be obtained only by 
1 See p. 22 et seq. 



THE CAUSE OF THE CRISIS OF 1893 121 

the presentation of legal-tender notes at the Treasury for 
redemption. This operation caused a further inroad upon 
the Treasury gold reserve. Larger amounts of funds were 
drawn from the country, and increasing amounts of gold 
flowed out of the Treasury in the redemption of legal- 
tenders. The limit was finally reached on April 22, 1893, 
when the gold reserve fell below the danger-line. At that 
time the fears of the public over the question of the standard 
of payments reached a climax. 

As soon as it became known that the gold reserve of the 
Treasury had declined below the danger-point of $100,000,- 
000 the apprehension relative to the fixity of the standard 
developed into a panic. There was an immediate rush to 
realize on all descriptions of property before the gold 
standard was abandoned. The public were afraid of the 
adoption, as the standard of payments, of a silver dollar 
which was worth only fifty cents in gold. At the same time 
overwhelming demands were made upon the banks to pay 
their accounts in gold or specie, and the cash thus obtained 
by depositors was hoarded and the existing money supply 
contracted. Under these conditions gold seemed scarce. 
In reality gold was only relatively scarce in comparison 
with the abnormal offering of property for sale on account 
of the fear of the silver standard. In the face of the uni- 
versal demand, however, to convert property into cash or 
some other liquid form of exchange, those having obliga- 
tions to meet found it impossible to secure funds, and the 
result was soon seen in widespread industrial and financial 
disaster. Distrust of the fixity of the standard gave way to 
unreasoning panic, and it was not until the House of Re- 
presentatives repealed the Sherman Law that the public 
believed that the gold standard was not going to be aban- 
doned. With the growth of this conviction confidence was j 
restored like magic; gold again flowed into the Treasury, \ 
and its depleted reserves were increased. 

The fiscal policy of the Harrison Administration, — the 



122 THE CAUSES OF THE PANIC OF 1893 

increase of Government expenditures and the cutting-down 
of Government receipts from customs, — by weakening the 
resources of the Treasury, provided favorable conditions 
for the play of the fundamental cause of the crisis, and thus 
hastened the precipitation of the disaster. The withdrawal 
of the enormous amounts of foreign funds during the years 
1891-93, which had been invested in the United States 
during the prosperous period 1886-90, also rapidly drained 
the Treasury of its gold reserves through the necessity of 
providing gold for export. This process, however, as 
already shown, was not itself a cause, but on the contrary 
was a consequence of the operation of the true cause of the 
crisis of 1893. The fundamental and effective cause of the 
crisis of that year was the fear as to the fixity of the gold 
standard, or, in other words, the apprehension, which was 
prevalent both in this country and abroad, that the United 
States would be unable to maintain the gold standard 
of payments. 



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